The news that Ocado has extended its debt facility and launched a share placing has been largely met with a negative reaction from analysts. The moves may give the online UK retailer breathing space but they insist its business model remains flawed.
Ocado, which has struggled against its larger supermarket rivals since floating in 2010, this morning (19 November) said it was selling 55.8m new shares to raise over GBP35m for expansion. It also said it had renegotiated the terms of bank loans worth GBP100m (US$159m).
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The online retailer said it had received offers from existing shareholders, including members of the board, to issue new shares, representing 9.99% of the company’s existing issued share capital, at 64 pence per share.
The news sent Ocado’s share price soaring 26.5% to 76.60 pence at around midday today, but the company is still a long way off its listing price of 180 pence.
Panmure Gordon analyst Philip Dorgan believes the move offers Ocado, which has struggled to make a profit since its flotation in 2010, a “lifeline”.
“Ocado now has the funds to survive for some time. This news, together with the short position, should see the shares rebound strongly,” he said.
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By GlobalDataDorgan, however, said it did not mean “the model is suddenly a good one”. Ocado’s sales, he said, had continually come in under City forecasts while some of its rivals were faring better.
“Historically, Ocado has needed equity funding on a regular basis and management will hope that February’s launch of the CFC2 goes to plan,” he said.
Ocado’s CFC2 project comprises the construction of a warehouse facility in Dordon in north Warwickshire, which the retailer said today “remains in line with budget”. The plant is expected to be up and running by February.
However, analysts have, in the past, cast doubt over the financial position of Ocado as it spends money on a new warehouse while sales growth stumbles.
In June the retailer reported flat first-half profits and in September reported a slowdown in sales growth in the third quarter.
In a trading update today for the 14 weeks to 11 November, Ocado said it achieved year-on-year gross sales growth of 11% – growth, however, that analysts believe is “underwhelming” given its “relatively modest size”.
“In recent weeks Asda and Sainsbury have recorded online grocery sales growth of over 20% whilst we believe Waitrose has a grocery business that is growing in considerable multiples of Ocado’s run-rate; sales figures released last week by Waitrose reported online revenues up by 79% with year to date sales up by 25%, the significant of this statistic is that Ocado depends upon Waitrose for its core proposition,” Shore Capital analyst Clive Black noted.
Above all, Black believes Ocado has not demonstrated it has built a sustainable business model.
“What is clear to us is that Ocado has consistently disappointed the market with its trading and financial performance; the pre-flotation forecasts for Ocado are a country mile away from the group will report for this year. What is clear to us is that Ocado will struggle to deliver satisfactory financial metrics any time soon and that shareholders and lenders need to be very switched on as to the reality of the situation.”
Analysts had previously warned the company was in danger of breaching its debt covenants, but aside from paying back its debt, Conlumino analyst Joseph Robinson believes Ocado needs to also concentrate on growing its scale.
“Ocado is going to need all the investment it can, not just through [a new warehouse] but investment through pricing and non-food. It’s got challenges and it is doing some positive things at the moment, but there is a question mark over the long term.”
Robinson said that while the debt deal and share placing puts Ocado on “a more stable footing” in the short term, question marks remain over the long-term profitability of its model.
“Ocado is making quite positive strides in a number of areas for example, it’s focused more on its private label and then there is the Tesco price match and it has done some interesting things with delivery packs.”
However, he added: “There are still lingering question marks over the long-term profitability potential of that model. Ocado has done a lot of positive things but it is also encountering a market which has become a lot more competitive as well.”
Robinson says the food industry is becoming increasingly characterised by “more regular and deeper discounting”.
“In terms of promotional activity with the big four grocers, obviously Ocado, in the short-term, has got that to deal with as well.”
