LONDON BRIEFING:Ocado offers a fabulous service – but that doesn't make it a good investment, writes FIONA WALSH
IT STARTS with an “O” and ends with an “O” and, according to one analyst, it’s worth the same – zero. But Ocado, the grocery delivery company, is being touted to investors at a far from knockdown price of between £800 million and £1.1 billion.
The long-awaited and much-hyped flotation of the online food retailer moved a step closer yesterday as the price range for the shares was set at 200p-275p a share. The final figure will be decided later this month after City roadshows have assessed likely demand from investors. But the wide price range is an indication of just how divided the City is over the true worth of the company.
Founded 10 years ago by three former Goldman Sachs bankers, Ocado delivers groceries for Waitrose, food retailer of choice for the nation’s middle-class shoppers. Its well-heeled customers simply adore the service – polite, smartly dressed drivers delivering exactly what was ordered at exactly the right time.
Colour-coded shopping bags – fresh goods separated from household products – are carried through to the kitchen by the driver as a matter of course and without complaint. There’s even an iPhone app for customers to create their shopping lists.
There’s no doubt the Ocado service is a cut above other supermarket delivery operations. But can the business, which has burnt through cash since it was set up and has yet to make a profit, really be worth £1 billion?
Ocado’s army of advisers – there are eight investment banks underwriting the share sale – certainly seem to think so. As do its founders, who stand to reap multimillion-pound windfalls in the float.
But many analysts and fund managers in the City are highly sceptical not only on the pricing but also the timing of the float. Philip Dorgan, retail analyst at Ambrian Partners, believes a fair market value of the business to be no more than £500 million, way below the lowest point of the pricing range set yesterday.
While he accepts that Ocado is a unique concept, has good customer service and strong sales growth, Dorgan contends that its model is structurally flawed. While other food retailers select stock for delivery from their stores, Ocado, which has no stores, picks products for delivery from a dedicated warehouse. The economics of this approach simply don’t add up, Dorgan says. At Ocado’s level of sales (£427 million last year, but now running at more than £500 million a year), Tesco’s online delivery service was making an operating profit of £12 million compared with Ocado’s loss of £14 million.
It takes two views to make a market and there is, of course, a bull case for Ocado. Nick Coulter at Numis Securities is excited by growth prospects of the online grocery delivery market and expansion opportunities abroad. A planned second warehouse should bring improved efficiencies, he says. While some analysts say it could be several years before Ocado moves into the black, Coulter is forecasting profits of £8 million next year, rising to £72 million in 2014. The business is, he believes, worth £1.3 billion.
As befits former Goldman Sachs bankers, the well-connected founders of Ocado have already attracted an eclectic and high-quality register of investors. These include the John Lewis pension fund, with just over 26 per cent of the shares now but falling to just under 11 per cent after the float; the US consumer goods giant Procter Gamble; Tetra Pak billionaire Jorn Rausing; hedge fund tycoon Nick Roditi; and Al Gore, the former US vice-president and Nobel Prize winner.
The chairman of Ocado is Michael Grade, the former ITV chief, who is certainly well-known in the City but whose patchy track record is regarded by many fund managers as another reason to be wary of the float.
The backers of the business, including the Goldman Sachs boys, stand to collect more than £400 million in the float, while the advisers are in line for fees of £15 million.
Ocado customers are now receiving e-mails from the company inviting them to buy shares – anyone who has spent over £300 on deliveries since the start of the year will be able to apply. But they should think long and hard before they part with their cash – there are 19 pages of risk factors in the prospectus and they would do well to take a close look at them. They range from warnings about Ocado’s reliance on Waitrose to the fact that it may need to raise further substantial additional funds from 2012. It does not expect to pay dividends in the foreseeable future.
Analysts such as Dorgan may be too pessimistic in their assessment of Ocado’s prospects but there are enough warning signs over the float to make any sensible investor think twice. Yes, it’s a fabulous service, but that doesn’t make Ocado a fabulous investment. Personally, I’d rather spend my money on a delivery of neatly bagged groceries.
Fiona Walsh writes for the Guardiannewspaper in London
