Pure-play groceries picker, packer and deliverer Ocado (OCDO), sold down heavily following the recent launch of AmazonFresh, rebounds more than 12% to 233.4p on reassuring interims.

These confirm gains in a deflationary grocery market, gross sales up almost 14% to £582.9 million and profit before tax improved at £8.5 million (2015: £7.2 million), though the online supermarket faces a number of fresh challenges.

CEO Tim Steiner insists 'we have been gaining share in the online grocery market and expect this to continue. The last few years have shown beyond doubt that British shoppers are choosing the benefits of grocery shopping online and we believe that the momentum of channel shift away from bricks and mortar stores will continue. The more opportunities customers have to try grocery shopping online, the more they will be attracted to Ocado's superior customer offer.'


While Ocado's results reveal top and bottom-line improvements as well as growth in order volumes and the active customer base, the hard facts are Ocado still doesn't make much money. EBITDA (earnings before interest, taxation, depreciation and amortisation) grew 5.7% to £40.4 million in the six months to 15 May, a slowdown from 11.4% growth a year earlier, while the supermarkets price war is impinging on average basket value, down 2.2% to just over £110 in the half.

There's also a cautious outlook from Ocado, a 'marmite' stock among investors, which expects the market to remain competitive with continued impact on average baskets, flags capital expenditure of £150 million for the current financial year and trades without a dividend.

Ocado's greatest asset is its technology; it enables Bradford-based supermarket Morrisons' (MRW) online business. Steiner remains confident about signing up international grocers to the group's Ocado Smart Platform, though has yet to persuade a big name retailer to sign on the dotted line. Uncertainty following Brexit doesn't make the task any easier.

Broker Shore Capital writes: 'Then there is the matter of Amazon (AMZN:NDQ), will it acquire Ocado for a big premium to the present share price? We cannot rule such an eventuality out but neither can we rule it in. Indeed, Amazon has had ample opportunity to acquire Ocado to date with no evidence of interest. Indeed, with every quarter than goes by, Amazon gains more insight into groceries in the USA and the UK alike, which surely takes it away from an acquisition, with Ocado now a key pureplay competitor in its sights in Greater London.'

Web chart - OCADO - June 2016

Shore Capital further argues 'that Amazon Fresh represents the most serious competitive commercial challenge to date, trading head-to-head in the pure play market. It is too early to say whether Ocado notice any impact from Fresh in recent weeks, we doubt it, but management has a lot more to be concerned about; as it does with Tesco's (TSCO) own Fresh initiative, which should be compressing Ocado's fresh food gross margins.'

Issue Date: 28 Jun 2016