Ocado fans have long struggled to convince some investors that the online grocer is in fact a technology company. But this year the business has really fallen out of favour, with its share price down by more than 50 per cent since the start of January.
The company, which has slipped out of the FTSE 100, trades at less than a third of its value five years ago, when the shares were north of £11 apiece. No doubt some contrarian investors are beginning to eye the stock, and it is slowly starting to creep up brokers’ lists of most popular shares. But are these investors being lured into a value trap?
Ocado’s recent history on the market has been tough. In the past ten years it has missed the market’s expectations for losses per share six times, according to data compiled by FactSet.
Its chief executive, Tim Steiner, founded the business in 2000 and it listed in 2010 at a valuation of nearly £1 billion. The stock surged during the pandemic when online shopping boomed, but the company struggled to keep up with demand, and eventually lost out to big supermarkets such as Tesco and Sainsbury’s.
That said, the traditional retail part of the business is now performing well. Ocado Retail, which is a joint venture between Ocado and Marks & Spencer, reported in March that its active customers had risen by 6 per cent to 1 million, and its average basket size was beginning to stabilise, at around 45 items worth £125. Meanwhile, the market researcher Kantar found that Ocado was the fastest growing grocer over the three months to May 12, with sales up by 12 per cent, compared with a 5 per cent rise in the wider market.
But it is not this part of the business that draws in most investors. In fact, while Ocado Retail accounts for about 85 per cent of the top line, it is responsible for less than 10 per cent of the group’s overall valuation, according to estimates by analysts at JP Morgan.
This is because investors are betting on the growth of its proprietary technology, including the Ocado Smart Platform, through which it sells its robot packing expertise to other retailers. Ocado’s expertise here is highly valued because the automation process for food packing can be more complicated than other industries, as grocery products need to be stored in different conditions and picked more precisely.
But key to its growth is also expanding its customer fulfilment centres (CFCs) for its partners. These are automated warehouses, where robotic arms prepare orders. Ocado already runs seven CFCs across the country, but analysts fear it is not growing as fast as expected internationally — only three new CFCs are expected to go live abroad in its current financial year.
Cash flows have also been a historic concern. Ocado’s underlying cash flow improved by £356 million to an outflow of £473 million in its last financial year, and the company has guided to a further £100 million further improvement this year, though it is not expected to be cash flow positive until 2029.
Investors should also keep an eye on the group’s net debt, which came in at £1.1 billion last year. While all its borrowings are on fixed rates, given the current rate environment analysts at JP Morgan expect the company may have to refinance this debt at a “substantially” higher cost.
This column last rated Ocado as an avoid in July last year, and since then the shares have lost almost half their value. Yet it still trades at an enterprise value of 31 times forward earnings before interest, taxes and other charges, which seems steep given its road to growth may still be a bumpy one, and it is not expected to make a pre-tax profit for at least five or six years. A valuation at this level leaves little room for error.
ADVICE Avoid
WHY High valuation depends heavily on the success of a risky growth story
Seraphim Space Investment Trust
This has been this year’s best performing trust, with the share price almost doubling in the year to date, according to the broker Winterflood. However, the company, which backs private space technology businesses, still trades at a double digit discount.
The £157 million investment trust, which listed in the summer of 2021, has had a rocky life on the stock market. The shares fell as low as 26p last July, as the rising cost of borrowing hit some of the valuations in its growth focused portfolio.
But the trust has been progressing well as the market has readjusted to a higher rate environment. Recent results showed that its biggest holding, the Finnish microsatellite manufacturer ICEYE at just over a fifth of its net asset value, has become profitable on an ebitda basis.
The trust reckons that about 60 per cent of its companies are now fully funded to break even, and the remainder of the portfolio had ten months’ worth of average cash runway, as of the end of March.
The shares have been supported by very strong structural demand, especially in defence and sanctions compliance where there is growing appetite for high quality satellite imagery.
Investors should note however that the portfolio is very highly concentrated — its second largest holding is D-Orbit, a space logistics business, at 15 per cent of NAV, followed by All.Space, a satellite antenna specialist, at 11 per cent.
Seraphim shares trade at a 29 per cent discount to their net asset value, which is certainly wide compared with an average of about 7 per cent among London’s listed investment companies, but compares against its 12-month average of 52 per cent. This is certainly no investment for the faint-hearted, and the shares are prone to volatility.
This column last rated Seraphim as a buy in late January, when the assets were notionally trading at half price. It has already returned about 34 per cent. Given the speed of these returns, its highly concentrated positions and its modest size, it may be time for a more cautious approach.
ADVICE Hold
WHY High growth possible but shares volatile
