Ocado today announced an agreement with Australian retail group Coles to build two automated warehouses over the next four years.
Ocado continues to make moves with its world-leading technology
- A strong rise in share price alongside an inability to forecast profits accurately leave the shares as a ‘hold’ for medium to high risk investors.
- Long term benefits could be significant for Ocado as they receive fees based on future sales from retail giant Coles which boosted shares by 5%.
- Deal is likely to reduce earnings in the current financial year due to expensive upfront costs.
Ocado today announced an agreement with Australian retail group Coles to build two automated warehouses over the next four years. Coles has 818 stores across the country with annual sales of around £22bn and already operates a delivery service generating Aus$1bn in revenue. It will pay some fees upfront but Ocado said the deal will reduce its earnings in the current financial year.
This is another very positive move for Ocado as it focuses on exploiting the great advantage it has with world-leading technology in automated warehouses and online grocery delivery. Deals such as this are expensive in terms of upfront costs, but the longer term benefits could be significant as Ocado will receive fees in the future based on sales achieved. The cash received from its recent deal with Marks & Spencer will prove very valuable to Ocado in enabling it to fund its existing technology deals as well as enter into further deals with retailers around the world, such as Coles. It was no surprise to see the shares respond positively with a 5% rise taking them up to a new record high.
The difficulty for investors is that it is hard to forecast how much profit it is likely to end up with from these deals whilst the company continues to make losses. That is not expected to change for some time which makes it harder to value the shares. Given that, alongside the strong rise in the shares recently, we see them as no better than a ‘hold’ for investors willing to accept a medium to high level of risk.
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