Ocado’s Bold Move: Taking on Automation Vendors with its Smart Robotic Platform
Ocado has recently launched its revolutionary robotic technology, the "Ocado Smart Platform," as a standalone automated integrated system. With this bold move, the company is now extending its services beyond the food retail sector and entering the realm of non-food retailers and logistics companies. As a result, Ocado is poised to compete directly with other top-tier automation providers like Dematic, Autostore, Swisslog, TGW, and more. This strategic expansion marks a significant milestone in Ocado's quest to establish itself as a dominant force in the automation industry.
Ocado, the British online supermarket and technology group, returned to underlying profit in its first half and stuck to its guidance, saying its retail operation won more customers and its robotics business progressed, sending its shares soaring.
There were two broad reactions to look at Ocado Group's interim results, with the overriding one for investors sending the shares to a five-month high.
On the positive side of the coin, the big news perhaps was that Technology Solutions, the business upon which most of the market value is based, was profitable on an underlying basis.
What’s more, the UK joint venture with Marks & Spencer, Ocado Retail, was also EBIDTA-positive in the second quarter.
With an ongoing positive contribution from Ocado Logistics, the arm that provides deliveries for the JV and for Morrisons, this meant the group was able to boast a rare positive EBITDA of £16.6mln.
It was also a surprise for City analysts, who had been expecting a £22.3mln EBITDA loss.
UBS analysts noted that group revenue was above consensus, with a beat from Retail and Technology Solutions, while cash flow also improved.
Retail’s improvement was put down to increasing average selling prices while the number of items per basket remained stable.
The positive EBITDA from Retail in the second quarter “may augur well” for the full year, said analyst Clive Black at Shore Capital.
Richard Hunter, head of markets at Interactive Investor, said it was a major development for the Solutions business being in the black “after an inordinately long time of being in the doldrums".
As well as a 59% increase in revenues, earnings at Solutions were boosted by 35% growth in live ‘modules’, with 25 robot-run client warehouses in operation at the half-year point.
“At the same time, operating costs were reduced and, leveraging the group’s OSP technology, Ocado is now seeking to expand growth outside of grocery through its Ocado Intelligent Automation service, where it is currently in talks with several potential partners,” said Hunter.
Long-term followers may be long-suffering, but any recent investors enjoyed a 19% rise on the day to above 692p for the first time in over five months.
“It remains to be seen whether this new venture will succeed, with long-suffering shareholders having been previously disappointed with the group’s pace of progress.”
UBS agreed that the results were “dampened” by other factors, led by delays to two openings for Coles Supermarkets in Australia.
This is “somewhat worrying”, said Black, possibly hinting at “cold feet” at Coles, while also noting “what appears to be slow progress in the USA with Kroger”.
He said there was a sense that, with the greater involvement of M&S at Ocado Retail, “tough decisions are being taken about the customer fulfilment centre footprint”, including the “remarkable” recent decision to close the Hatfield centre and the mothballing of new CFCs to expand the reach of the delivery proposition.
What’s more, group profit margins remain “derisory” at 1%, said Black.
Looking forward, Ocado pointed to a difficult third quarter for Retail due to tougher comparison with last year’s sales volumes, though growth is expected to accelerate in the fourth quarter.
Technology Solutions and Logistics are both seen remaining EBITDA-positive.
Underlying cash outflow is expected to improve by around £200mln from both Retail and Tech Solutions.
The bottom line was that pre-tax losses mounted by 37% to near £290mln, mostly from depreciation and amortization, which Black noted are “real numbers” for a company like Ocado that capitalises costs and has robots and components that get old and can cause fires.
With central bank interest rates moving away from the abnormal near-zero levels that helped boost stock market investment in the years since the 2008 crisis, Black noted that “equity investors are now demonstrably, and rightly, more interested in positive earnings, free cash generation, capital returns and the configuration of balance sheets”.
“Accordingly, stories like jam of the next generation never mind tomorrow, like Ocado have been found out with profound consequences for its equity valuation and so strategic direction, capital expenditure capabilities, and cost control; all of which is evident in H1”.
Assistance to the Ocado share price from recent rumours of Amazon interest were also poo-poohed by Black and others.
“Amazon is already a master at robotic-led warehouses so one has to wonder why it would need to buy Ocado,” said Russ Mould at AJ Bell.
“Yes, it wants to be bigger in the food sector – but it could just become a technology customer rather than buy Ocado outright if it wanted to take advantage of the systems.”
Black said they were “spoof bid stories”, because if Amazon or anyone else was talking to the Ocado Board or had even just made an approach, then the recent share price moves would have led to the UK Takeover Panel seeking clarification.
Hunter agreed that the Amazon reports were rather "vague" and their timing saved Ocado from being relegated from the FTSE 100.
“Ocado has become something of a perennial 'jam tomorrow' stock, which investors have abandoned after patience wore thin," he said, noting a 79% fall in the shares since September 2020.
“It will take some considerable effort for the group to reverse the entrenched cynicism of potential investors," he added.
As for Black, he said, “the numbers remain grim, time is running out for this story, with the jam drying up."