British Online Supermarket Ocado Upgrades Annual Earnings Forecast; Target Price GBX 2,450

Ocado Group, the world’s largest online pure-player grocery supermarket, upgraded their annual earnings prediction for the second straight time in just two months, largely driven by a surge in demand for food delivery services amid the COVID-19 pandemic.

The British online supermarket expects EBITDA of more than 70 million pounds, up from a forecast of over 60 million pounds made last month. If realized, that would be a more than 60% surge in EBITDA from 2018-19’s 43.3 million pounds.

“With three new warehouses opening in 2021 which will ultimately give us 40% more capacity to our business, we look forward to being able to offer more slots to existing customers while welcoming new customers to Ocado and showing them what we can offer,” said Melanie Smith, Ocado Retail’s Chief Executive Officer.

At the time of writing, Ocado’s shares traded 3.23% lower at GBX 2250.77 on Thursday. However, the stock is up over 75% so far this year.

“Ocado Group’s (OCDO) Q4 sales confirmed strong UK gains but accelerated online market share losses. Another bump up in FY EBITDA expectations is entirely linked to the smooth redistribution of UK online slot demand across the week. As OCDO outlines in its outlook for 20/21, next year’s profit outlook will largely depend on a non-time delivery of additional capacity and a lack of reversal of this year’s consumer behaviour,” said James Grzinic, equity analyst at Jefferies.

Ocado Stock Price Forecast

Seven equity analysts forecast the average price in 12 months at 2,447.50p with a high forecast of 3,455.84p and a low forecast of 1,742.09p. The average price target represents a 10.87% increase from the last price of 2,207.51p. All those seven analysts, three rated “Buy”, four rated “Hold” and none “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of GBX 1,820 with a high of GBX 2,836 under a bull-case scenario and GBX 1,219 under the worst-case scenario. The firm currently has an “Equal-weight” rating on the online supermarket’s stock.

“We derive our price target from a DCF-based SOTP. We value the Retail business at c.508p. We value the remaining solutions business at c.944p, of which Kroger (477p). We include additional contract wins in our Base Case to the value of 300p. The remainder is cash and deferred consideration from M&S. Values are determined using DCFs (WACC 7.5%),” noted Maria-Laura Adurno, equity analyst at Morgan Stanley.

Several other analysts have also upgraded their stock outlook. Ocado Group had its price objective increased by Berenberg Bank to GBX 2,530 from GBX 2,430. The brokerage currently has a buy rating on the stock. Peel Hunt raised the target price to GBX 2,800 from GBX 2,490. Citigroup reiterated a buy rating and set a GBX 2,900 target price.

Analyst Comments

“We would expect the comment around the guidance upgrade to be taken positively by the market rather than focus on the fact that, sequentially, there has been a softening in basket size as well as Retail revenue growth. Online penetration in food retail is c.7.8% (pre-COVID-19 outbreak) in the UK and it is one of the most advanced markets. Ocado benefits from increasing penetration through its Retail and Solutions businesses,” Morgan Stanley’s Adurno added.

“Best-in-class tech suggests upside from additional capacity on existing contracts and new contracts. There is competition on the micro fulfilment side. Limited near-term catalysts, execution risk. Current valuation captures part of the upside (prospective contracts and acceleration in existing ones).”

Upside and Downside Risks

Risks to Upside: Ocado signs additional large international contracts, the greater scale from new contracts helps drive profitability for the whole group. With respect to existing contracts, partners ramp-up faster – highlighted by Morgan Stanley.

Risks to Downside: Execution risks as the company struggles to keep up with newly committed capacity, resulting in downsizing of existing contracts. The slow pace in getting new contracts, which are also smaller in size.