Who would have been a bear on Ocado yesterday? Short-sellers in the online grocery delivery group took a massive bath to the tune of at least £53 million after Ocado surprised the City by announcing its first “end-to-end hardware and software” licensing deal with Groupe Casino, of France.
The deal sent Ocado’s shares rising by 21 per cent, or 53½p, to 309½p after the French retailer said that it wanted to use Ocado’s robot and software technology to deliver to its Monoprix grocery customers.
According to the Financial Conduct Authority database, more than 16 per cent of Ocado’s shares are on loan, or “shorted”, with Discovery Capital holding the largest position of nearly 3 per cent. Investors that “short” a company borrow shares and then sell them, hoping to buy them back later for less, return them to the lender and keep the difference.
Many of these funds would have gained over the summer when Ocado’s share price slumped as hopes faded that it would sign a big international partnership this year, so some of the loss yesterday might simply have reversed previous gains.
Nevertheless, it was a big blow to the case for the Ocado bear. Its deal with Groupe France met with such a positive reaction in the City because it was the first tangible sign that its plan of becoming a technology provider, capable of licensing out its “Ocado Smart Platform” to a host of mainstream overseas third-party retailers, was more than just a dream.
Ocado first promised that it would agree such an international licensing deal by the end of 2015. It took until June this year, though, to announce its first deal, which turned out to be a damp squib. Ocado didn’t name the retailer, other than to say it was “European”, and its mysterious partner initially signed up only to use Ocado’s software from its own manually operated warehouse. It did not request the full “automated mechanical handling equipment” that Ocado has long claimed would have retailers forming a queue.
This is why the Groupe Casino deal is important and why Ocado could justify its eye-watering rating. Ocado will work with Groupe Casino to build a big warehouse near Paris, complete with robotic picking arms and software to help the retailer to deliver products. French consumers buy groceries online but tend to “click and collect” and Groupe Casino wants Ocado to help to bring them a slicker experience.
Financial details were thin on the ground yesterday, but Ocado is facing at least £15 million of capital expenditure and Casino is on the hook for some upfront cash and fees during the two-year build phase and as the warehouse starts to operate. There is some protection for Ocado once the French warehouse comes online as it will generate fees according to the capacity that Casino requests, not uses. There is already speculation that Ocado is close to signing up ICA, the Swedish retailer.
Ocado has said that from the end of this financial year it will start to split out the performance between its Ocado Solutions technology licensing platform from its Ocado Retail unit. That speaks volumes to its belief that this division will become a bigger contributor to Ocado’s revenue and profit. After all, the company has barely made a profit since it was founded in 2000.
There is still room for a bear case, but the group went a long way to proving its doubters wrong. Ocado is still a long way from the peak of 470¾p a share it reached in 2015 and, with more deals in the offing, the shares could be in for a bull run.
ADVICE Buy
WHY Ocado has defied its critics. If this is the first of a number of licensing deals, there could be further growth
Shaftesbury
It may no longer have the likes of Jimi Hendrix strutting past its shops, but Carnaby Street is still very much in fashion.
Shaftesbury — the property landlord that takes in the pedestrianised thoroughfare as part of its 600-building portfolio across nearly 15 acres of London’s West End — reported a 7 per cent rise in capital values to £3.64 billion yesterday.
Pre-tax profits for the year to the end of September reached £301 million, compared with £99 million in 2016.
The strong growth comes despite rising inflation, terror attacks in London and business uncertainty about Brexit. That is testament to the skill of Brian Bickell, a chief executive respected by shareholders and the wider property industry. Mr Bickell and his team are good at finding the right shops, restaurants and shops for an area, while building up a portfolio in central London that cannot be matched.
Its portfolio is heavily skewed towards shops and restaurants (comprising 70 per cent of its assets, compared with only 17 per cent in offices and 13 per cent residential), which also have benefited from the boost to tourism in the capital from a weaker pound.
All of which demonstrates that any sale is not going to come cheap. Since 2014 there have been reports of Samuel Tak Lee eyeing it up. The Hong Kong billionaire owns the Langham Estate, 14 acres of Fitzrovia close to Shaftesbury’s estate. He also has been increasing his stake in his FTSE 250 rival and is now the biggest shareholder, with 25 per cent.
Other investors, which include Invesco, Blackrock, PGM and Norges (Norway’s sovereign fund, which owns much of nearby Regent Street) are not going to give up their holdings without a fight. Yes, yields in this part of London have compressed, the vacancy rate has increased from 3 per cent to 6 per cent and rental income is likely to slow, but such a series of assets cannot be replicated. Holding shares is either a long-term gain or a huge short-term profit if a bid from Mr Lee is accepted. Either way, it’s worth getting in there quick.
ADVICE Buy
WHY A unique and well-run portfolio means long-term gains or a big windfall if a bid for the company is accepted
