Ocado Kroger partnership: analysts’ reaction

Barclays

“We think this is just about as positive a deal as could have been expected to have been announced by Ocado. The company now has an extremely credible partner in the largest grocery market in the world. With a commitment to identify 20 CFCs over the next three years, the pressure for Ocado to announce a certain number of CFCs per annum should subside (for some time at least). As the company also pointed out, agreeing 20 CFCs with one partner has multiple benefits compared with agreeing 20 CFCs with 20 different partners. Ocado will remain a challenging valuation exercise but this agreement is an unmitigated positive in our eyes.”

Bruno Monteyne, senior analyst, Bernstein

The deal with Kroger doesn’t come as a surprise, but is “materially larger” than Bernstein had expected, with the potential for up to 20 customer fulfilment centres compared with just the one that Bernstein had envisaged as a starting point. Kroger taking a 5% stake in Ocado gives the UK company the capital it needs to continue building other customer fulfilment centres.

David Beadle, vice president – senior credit officer, Moody’s

“Ocado’s announcement of an exclusive deal in the US with The Kroger Co is credit positive for the UK based online grocery specialist. The deal’s scale is significant relative to Ocado’s other Smart Platform contracts. We note Kroger’s subscription for new shares in Ocado and anticipate the cash flow dynamics of the relationship will support Ocado’s solid liquidity profile.”

Numis

“With Kroger identifying 20 CFCs over the first three years of the agreement, this is clearly a transformative deal for Ocado, and one that is on a completely different scale to those announced in the past. We have little doubt that an attractive ROIC will be achieved on the huge amount of capital set to be invested across Ocado’s global OSP partnerships and, with a significant long-term earnings runway now in place, retain our positive stance.”

Greg Lawless, Clive Black, Shore Capital

Ocado should be commended for its “significant potential deal” with Kroger, but Shore questions the materiality of the international deals and when they will make a fundamental difference to both revenues and earnings. Kroger buying new shares in Ocado will also dilute earnings.

UBS

In a recent no note we posited future OSP deals should have superior economics due to lower costs compared to the initial CFC’s partnerships (Casino, Sobey’s). Our indicative NPV was £73m per future CFC. “Applying that rule of thumb suggests today’s partnership could be worth up to £1.5bn net to Ocado. This morning’s action, with the shares up c.£2.10/sh (+38%) as we write, seems initially comprehensible on this basis.”