Online supermarket Ocado (OCDO) has at long last inked a deal with an overseas retailer to use its ‘Smart Platform’.

Shares in this ‘marmite’ stock (investors tend to either love it, or hate it) tick 12.75p (4%) higher to 328.75p on the news, with boss Tim Steiner, who’s been promising to deliver for over a year and a half, still expecting to sign ‘multiple deals in the medium term’, although some may be disappointed by the absence of financial details about the tie-up.

Ocado’s smart move

Ocado’s new partner is an as yet unnamed regional European retailer that according to today’s statement, ‘wishes to remain anonymous until it launches its online business in order to retain competitive advantage’.

In news investors have been waiting for, the mystery partner will pay an up-front fee to Ocado for access to its Ocado Smart Platform (OSP).

The OSP gives access to Ocado’s software required to run an online grocery business. It also includes the ability for retailers to fufil orders from their own stores or warehouses, or to use Ocado’s highly efficient warehouse operations.

Ocado, which already runs online delivery services for Morrisons (MRW) and Waitrose, says its mystery partner will also pay ongoing fees based on the volume of products sold online, but it will not be using Ocado’s automated warehouse technology. This means the client’s own workers will manually load the shopping for delivery.

Absence of hard numbers

Ocado naysayers will note the arrangement will be earnings and cash neutral in the current and 2018 financial years, albeit ‘increasingly accretive thereafter’.

CEO Tim Steiner comments: ‘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.’

Eye-watering rating

Ocado, which first began commercialising its intellectual property (IP) in 2013 with its deal to run Morrisons' online business, trades on a stratospheric 235 times forecast earnings of 1.4p.

This eye-watering valuation reflects the potential to licence out its IP to retail partners, an online delivery deal with Marks & Spencer (MKS) recently rumoured, as well as the outside chance of a takeover bid, rather than excitement over its organic growth in a testing UK grocery market.

Ocado - JUNE 17Devil is in the detail

One commentator pouring a bit of cold water on today's tie-up is Neil Wilson at ETX Capital.

‘This is good news for sure. Investors have shown a great deal of patience and while the rewards from this agreement won’t be immediately forthcoming, it bodes well for the future.

But the devil is in the detail and while welcome it’s unclear what actual value this deal in itself will bring to Ocado. Financials details about the tie-up are non-existent at present. The European retailer will not be using Ocado’s automated warehouse technology.

We don’t even know who the company is – Ocado simply dubs it a ‘regional’ retailer (not a national one). This is progress after a lot of promises, but it’s not exactly like doing a deal with Wal-Mart – yet.’

Wilson adds: ‘Investors should be relatively hopeful that this is just the first of a slew of new deals around Europe. But they may want to watch just how much the technology push eats up cash and whether these deals increase the burn. They will also need to beware a potential slowdown in the UK retail market.'

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Issue Date: 05 Jun 2017