Ocado is “run for cashflow”, according to its management; not an objective elucidated by its accounts. The FTSE 100 group blazed through another £320 million in the first six months of this year — about a quarter of the net cash on its balance sheet at the end of last year. The total generated by the business was less than half last year’s level, at £10.3 million.
Pre-tax losses widened to £290 million from £211 million over the same period last year. Turning a statutory profit is not something Ocado will achieve any time soon, with analysts forecasting a loss of £115 million in 2027.
The costly expansion of its “solutions” business, which licenses its warehouse and logistics technology out to other retailers, continues to suck up capital. It has coincided with a slump in the revenue growth generated by its retail joint venture with Marks & Spencer since the boom in online shopping during the pandemic.
That business, which accounted for 86 per cent of overall sales, generated a £2.5 million loss during the first half of the year, even on Ocado’s flattering and preferred profit measure. Some expenses, such as marketing, have been trimmed to fit weaker consumer spending. Others, like support costs, have risen. Average orders per week have increased by 4 per cent to 399,000 but customers are buying fewer items per basket. Price inflation of just over 8 per cent did most of the heavy lifting in raising revenue 5 per cent.
The joint venture with M&S has failed to live up to expectations in 2019, the time the £750 million deal was signed, Tim Steiner, Ocado’s boss, has conceded. M&S chairman Archie Norman is “not happy” either. Little wonder Ocado has reduced the value of the final instalment it expects to receive to just £78 million, less than half the £191 million that could be up for grabs.
Ocado’s shares have fallen by almost 60 per cent since the start of last year but an enterprise value of 65 times forward earnings before interest, taxes and other charges implies a dose of optimism that could well prove unfounded. Rapidly rising interest rates make jam-tomorrow stories far less palatable for investors. It has also made raising fresh capital more difficult and expensive.
True, Ocado has £1 billion in net cash on its balance sheet — deserving of question given the firm’s spending habits. Cash burn has been a feature of the last two and a half years. Steiner thinks the grocery delivery group can improve underlying cash outflows by £200 million this year, which would still leave it losing £634 million.
Any improvement could be difficult to sustain. The reduced outflow was driven by lower capex, with only two warehouses turning live in the first half: one in Japan for Aeon and another for Sobeys in Canada.
Cutting capex is not a sustainable strategy for plugging cash outflows. Justifying Ocado’s still racy valuation means it needs to continue building out the number of fulfilment centres it kits out for other retailers. Ocado reckons getting to 50 warehouses, which it hopes to achieve in the next three to five years, could fund the building of another ten annually. Only 25 are live so far. The annual £550 million in cash it thinks it could achieve at that point also excludes any new customers it signs up.
Technically, it has signed enough contracts — 64 — to achieve that number, but doing so according to its desired timeframe is more complicated. Kroger has pushed the button on only eight of the twenty fulfilment centres that it signed Ocado to fit out, including two currently under construction.
With the JV crutch faltering, cash generation looks precarious.
ADVICE Avoid
WHY A downturn in the retail business and high capex could cause cash generation to disappoint
Bloomsbury Publishing
The Boy Wizard is Bloomsbury Publishing’s most enduring hit but the book group is no one-trick pony. Selling online scholarly resources through annual subscriptions to libraries and other institutions is a fast-growing revenue stream and within that mix, digital resources are an important driver. Last year this revenue grew by 18 per cent to £26.2 million. The target is to push that forward by 40 per cent over the next five years without the help of acquisitions to £37 million.
Growth in digital resources brings with it margin benefits, as do higher sales of ebooks. The benefits of a largely fixed cost base, today’s elevated rates of cost inflation aside, could bring with it operational leverage benefits. Cash generated by Bloomsbury’s non-consumer business now accounts for more than 40 per cent of overall profit.
Diversification benefits have not been reflected in the market valuation of the publishing house. The shares look more undemanding than they have done in more than three years, at just under 15 times forward earnings. That’s also a discount to the five-year average. Investors should be willing to pay a higher price for the reliability of subscription resources — look at digital information giant Relx.
Pressure on discretionary spending has not hindered revenue generated by the core consumer division either. Organic revenue growth was 12 per cent higher last year, helped by sales of titles by Sarah J Maas, the American fantasy writer, rising by more than 50 per cent. The Harry Potter franchise remained in strong demand.
Bolting on more businesses to increase the mix of offerings further should not be a problem. Bloomsbury is highly cash-generative, which boosted the coffers by a net £10 million last year. Those cash balances could swell further still this year.
Analysts at Investec think the publishing house will end the next financial year with net cash of £58 million, up from £51.5 million last year. But investors should not expect special returns: expanding via acquisitions and investing in its existing business, including its digital operations, are more important priorities for the use of this capital.
ADVICE Buy
WHY Strong cashflow should help sustain growth
