Ocado Group
Sales £512m PBT £7.2m
All things are relative. Ocado may have beaten some forecasts for the half-year to the end of May, but we are still talking about a company that made a £7.2 million pre-tax profit, little changed on last time, but can expect revenues of more than £1 billion by the end of this financial year.
Barely profitable, then, and with the shares, up 16p at 446p, selling on an earnings multiple of above 200 for the current year. This was always Ocado’s problem. Its supporters say it is a potential world-beater, akin to Amazon, which can sell the technology developed by selling groceries online for itself, Waitrose and Wm Morrison to other retailers worldwide.
The rest of us scratch our heads, look at that multiple, and wonder. It does not help that the shares veer all over the place, with no apparent connection to events in the real world. As the graph shows, they were above £6 in early 2014 and have doubled since the autumn. For no apparent reason.
Most of the metrics are moving in the right direction, as one would expect for a high growth online business. Average orders per week, active customers and the number of items available to the same are all ahead.
One negative is the average spend per basket, off a couple of percentage points. This is down to typical supermarket price deflation and the move into areas such as kitchen equipment and pet food. The two distribution centres, in Dordon, Warwickshire, and Hatfield, north of London, are becoming more efficient. Ocado is committed to building two more, at a cost of £270 million, and capital spending almost doubled to £50.5 million over the half.
This will inevitably delay the arrival of real profits, though Morrisons may be prepared to chip in for one of those projects. Ocado says it has the headroom, given £80 million of cash expected to be generated this year, to carry the cost.
The company really needs to prove its model by finding one of those overseas grocers, Carrefour of France and Safeway of the US both having been mooted, to buy its technology. This may happen by the end of the year, but so could a decision by Waitrose to exit the partnership. Given where the shares are now, I would be selling.
My advice Sell
Why Share price is impossible to justify on any normal metric and seems disconnected from events, given potential downside
Northgate
Revenue £614m Dividends 14.5p
Investors will be relieved to learn that Northgate’s Spanish operation, the source of much grief in recent years, is now earning the sort of returns that will not lead to the board being put under any more pressure to sell the business.
The van hire company has benefited from the unexpectedly fast revival of the Spanish economy, with something similar happening at its operation in Ireland. This has allowed it to gain a share of the market serving SMEs, while moving away from block contracts with national companies.
The last business is less profitable, while it also means more wear and tear on vehicles, which reduces their resale value. Something similar is happening, in a more limited way, in the UK.
Spain is now generating returns on investment, the best measure of performance for such businesses, of almost 13 per cent, not much behind the UK. Figures for the year to the end of April are distorted by changes to depreciation, underlying profits up by 41 per cent to £85 million.
Northgate shares, perversely, fell by 43½p to 575p. They sell on 12 times this year’s earnings, which does not look expensive in the longer term given its strong market position.
My advice Buy long term
Why Multiple looks attractive given strong market position
St Modwen Properties
Net asset value 427p a share
The redevelopment of New Covent Garden Market has provided a huge and expected kick-up in the net asset value of St Modwen Properties, but it is far from the only bright spot in the property group’s portfolio.
The project, which will require the traders and their vans to continue to operate from the market while it is redeveloped over a decade, is the sort of difficult job in which St Modwen specialises. It takes unregarded land and converts it to commercial and residential use.
Covent Garden has just received planning permission and so could be taken onto the balance sheet for the first time. It therefore provides 58p of an 85p rise in net asset value to 427p.
However, as the chief executive, Bill Oliver, points out, even without the site’s contribution to profits these would have been up in the half-year to the end of May, at the pre-tax level, by 50 per cent to £75.1 million.
St Modwen is finding no difficulty in attracting investors to take on its commercial assets once these have tenants in view — no surprise given the strength of that market in the regions. Rental income still stayed static at £18.6 million despite disposals. The other two outstanding projects are the redevelopment of Swansea University’s Bay Campus and the old MG Rover plant at Longbridge, with a Marks & Spencer store opening later this year, ten years after the factory closed.
The shares, up 8p at 453p, have come up from below £4 at the start of the year. They sell on a slight premium to that net asset figure, but I suspect they have further to go. Worth tucking away.
My advice Buy
Why Development potential is not yet all in the market
And finally . . .
NextEnergy Solar fund is one of those investment vehicles, like the Renewables Infrastructure fund that I wrote about the other day, that came to the market to invest in green energy and offer investors a good, assured income. The fund has just reported on its first year as a public company. Net assets grew to more than £248 million from £86 million. The fund is indicating dividends of 6.25p in the current year, offering a forward yield of almost 6 per cent, which looks about average for the sector as a whole.
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