Ocado rockets after signing international partnership with France's Groupe Casino
Shares in Ocado surged after the online grocery retailer said it has signed an agreement with Groupe Casino to develop the Ocado Smart Platform in France.
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Ocado Group
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Ocado had already said back in June that it had signed an agreement with a "regional European retailer" but that the retailer wanted to remain anonymous until it launched its online business, in order to remain competitive.
The group said on Tuesday that it will provide Groupe Casino with its full software platform, know-how and support services to create "an efficient and intelligent online grocery business", with orders initially fulfilled from their manually operated centralised warehouse.
The agreement includes the construction of its latest generation, state-of-the-art automated warehouse - for which Ocado will invest to install its grid and its robots - its "best-in-class" front-end web site functionality, last-mile routing management and big data, real time implementation.
Casino will pay an upfront fee to Ocado for access to OSP, together with ongoing fees that are based on the volume of products sold online. Ocado said the the arrangement should be earnings and cash neutral in the current and 2018 financial years, and increasingly accretive thereafter.
Chief executive officer Tim Steiner said: "We are delighted that our partner has decided to adopt OSP for its online operations. This is an exciting step in the evolution of our business and in the delivery of our strategy.
"The benefits of our integrated solution are clear. As this particular retailer looks to develop its online offering the agreement we have signed provides the flexibility to expand its capacity efficiently in the future. We look forward to working closely with our new partner in the months and years ahead.
"Our discussions with other retailers across the globe are ongoing and we continue to expect to sign multiple deals in the medium term."
Neil Wilson, senior market analyst at ETX Capital, said: “Tim Steiner has finally delivered the major international tie-up long promised to Ocado investors. This is a transformative deal for Ocado as not only will it expose the firm to a large chunk of the French market, it could also be the launch pad for many more international partnerships. Casino has more than 11% of the French supermarket sector.
"Shorts could be in for a rough time and a short squeeze means this stock could open up +20% or more, even after yesterday’s pre-announcement moves."
Wilson added that investors should be relatively hopeful that this is just the start of a number of new deals around Europe. However, "they may want to watch just how much the technology investment eats up earnings and whether these deals increase the cash burn".
Shore Capital said: "Whilst we genuinely welcome the broadening of Ocado’s customer base, we continue to worry about cash burn in the business and the materiality of its expansion programme from a financial perspective, noting ongoing outlay in the UK where Amazon is more likely to be a competitor than a suitor; we shall also be interested to see the sales momentum in its core market and when.
"Ocado to our minds remains a capital hungry group that flatters to deceive, gaining a substantial valuation for years of underachievement in financial terms, having effectively being rescued three times including its IPO. The group’s shares could and probably will respond positively to the announcement of internationalisation in France. However, experience pays dividends for this non-dividend paying business, after seventeen years of trade, that has had a somewhat charmed existence to our minds. Hence, noting the moment, investors may do well to be very, very patient to see material financial rewards from the Groupe Casino tie-up, whilst we also await to see if trade stories on a relationship with ICA hold true."
George Salmon, equity analyst at Hargreaves Lansdown, said: “There’s never been much doubt about Ocado’s technology, but to what extent the group can monetise its wondrous whirring machines has long been debated. The news that a major French retailer has signed an agreement to utilise its software should go some way to swaying investors sentiment more conclusively in Ocado’s favour.
"While we’ll need to see more deals come through, this development has kick-started Ocado’s transformation from niche British retailer into an international provider of game-changing technology.”
At 0930 GMT, the shares were up 19% to 304.60p.