Ocado rides high on M&S promise, G4S knocks back approach

The question every Ocado shareholder has is whether the M&S tie-up will deliver. The answer so far, just a couple of weeks into the partnership, seems to be positive. Forward demand is strong, and management say adding M&S products has increased the average basket by around 5 items.

We should question though whether the novelty of getting Percy Pigs in your online shop will last.

Retail revenues – pre-M&S – accelerated from +27% in H1 to +52% in Q3 as the shift to online grocery continues apace, with the number of orders on a weekly basis up almost 10%. UK grocery sales rose 10.8% in the 12 weeks to September 6th, according to Kantar, which indicates Ocado is significantly outperforming. Shares in Ocado jumped over 6%, whilst MKS rose over 5% to 110p.

Of course, Ocado shares don’t trade on such lofty multiples because it runs a successful UK grocery business, but on expected recurring revenue streams from international partners. These have been slow to materialise and there was no further communication in today’s update.

Earnings from international partners remain slow to emerge and in July management cautioned that EBITDA from International Solutions would decline due to ‘continued investment in improving the platform and building the business, and from increased support costs with launch of initial CFC sites’.

Despite this jump in retail revenues, management can only promise full-year EBITDA of £40m. The problem for Ocado is it takes a long time to get a return from building costly fulfilment centres, while Marks will find out that it’s very hard to translate online grocery sales into profits.

On those Kantar numbers, it is worth noting that growth in supermarket sales decelerated in August because of the Eat Out to Help Out scheme, with sales down £155m compared with the July period. Shares in Tesco rose, while those in Sainsbury’s and Morrison fell.

UK unemployment rises, UK Internal Market Bill moves forward

UK unemployment rose to 4.1%, in a clear signal that the labour market is coming under increasing strain. According to the ONS, the number of employees in the UK on payrolls was down around 695,000 compared with March 2020. The claimant count rose to 2.7m, which is an increase of 120% from March levels. Over 5m people remained in furlough in July – how many are coming back?

Boris’s internal market bill cleared its first hurdle in the House of Commons but 30 Tory MPs abstained, hoping to water it down. The EU retaliated by delaying its decision on allowing  the City to continue clearing billions of euros every day in derivatives. London dominates the market but Paris and Frankfurt would both like a larger slice – of course you cannot strip it out of London very easily so this looks more like the European Commission flexing its muscles.

GBPUSD was steady in the middle of its range around 1.2860 having struck a high at 1.2920 in afternoon trading yesterday. Support to be found on the recent lows put in around the 200-day EMA at 1.2750.

Europe struggles on the open despite strong session in New York

European stocks faltered a bit after opening in the green, indicative really of the whole summer. The Euro Stoxx 50 neatly shows how European blue chips have drifted since June.

US stocks pushed up yesterday, with the S&P 500 pushing higher by 1.27% and every sector in the green. The Nasdaq was up almost 2%. Tesla shares rocketed 12%, while Nikola was up 11% before plunging 8% in after-hours trade.

Nikola responded to the Hindenburg research note but it seemed to me to be a rather weak defence with the company’s own promo videos on YouTube served up as ‘evidence’.

G4S rejects Garda World bid

Elsewhere, G4S shares were a little weaker this morning but largely held yesterday’s gains after the unsolicited approach from Garda World. A lengthy statement this morning rejects the offer in no uncertain terms, with management saying that the ‘highly opportunistic’ bid significantly undervalues the business. They go on to outline a detailed financial case on why they should not be bought.

Whilst the 190p offer represents a 31% premium to the undisturbed 145p the stock was trading at before the news broke, this only really recovers pandemic-related depreciation and G4S is probably right to demand a lot more for solid business that generates about £7bn in sales annually.

Always interesting to see how a company deleveraging  (G4S reduced net debt to EBITDA from 3.27x in 2015 to 2.58x today) makes you more appealing to a leveraged buyout, in which GW is a specialist.

Adelanto semanal: a pesar del predominio de los bancos centrales, la respuesta fiscal es clave

Esta semana rebosa de bancos centrales, ya que esperamos noticias de la Reserva Federal, el Banco de Inglaterra y el Banco de Japón, tras las reuniones del BCE y del Banco de Canadá de la semana pasada. La resolución del Banco de Japón podría verse eclipsada por la situación política del país, puesto que el Partido Democrático Liberal, en el poder, elegirá a su nuevo dirigente días antes de que la Dieta Nacional nombre a un nuevo primer ministro.

Entretanto, seguimos atentos a los datos económicos más recurrentes y a la publicación prevista para esta semana de las solicitudes de prestaciones por desempleo y de las ventas minoristas.

FOMC

La Reserva Federal (Fed) se reúne los días 15 y 16 de septiembre por primera vez desde que Jerome Powell declarara que el banco central estaría preparado para tolerar una mayor inflación a cambio de una recuperación económica y una creación de puestos de trabajo más rápidas. El desempleo ha caído desde su máximo durante la pandemia, pero su ritmo de mejora no es lo suficientemente dinámico.

No se prevé que la Fed anuncie ningún nuevo cambio de política, pero reforzará el mensaje que pronunció Powell desde Jackson Hole acerca del cambio de política. No cabe duda de que, actualmente, la Fed se centra principalmente no en la política monetaria, si no en la política fiscal, con los miembros del organismo a la espera de cualquier acción de Washington para emitir un nuevo paquete de estímulo.

Banco de Inglaterra

El Banco de Inglaterra (BoE) también se reúne esta semana entre una creciente especulación en torno a que The Old Lady of Threadneedle Street vuelva a recurrir a los tipos de interés negativos para estimular la economía.

En una reciente conversación con los miembros del Parlamento, el gobernador Andrew Bailey rechazó descartar los tipos negativos, una política que, por otra parte, ha fracasado sistemáticamente en su intento de proporcionar la inflación requerida en la zona del euro. «La tenemos [esta medida] en la recámara», afirmó. «En este momento, no tenemos planeado hacerlo, no prevemos utilizarla de forma inminente, pero la tenemos en la recámara».

Paralelamente, parece que la respuesta fiscal vuelve a adquirir mayor importancia, ya que los bancos centrales ya han sacado la mayor parte de su arsenal. La semana pasada, Andy Haldane, el economista jefe del BoE, advirtió de que el plan de regulación de empleo temporal no debería ampliarse; no obstante, ¿cederá el canciller a las solicitudes de que se prorrogue para proteger los puestos de trabajo? Conforme se avecina el fin del plan de regulación de empleo temporal en octubre, el gobierno puede verse obligado a ampliarlo para evitar una acusada destrucción de puestos de trabajo.

El yen japonés en el punto de mira

Es bastante probable que la volatilidad de los mercados de renta variable japoneses y del yen se acreciente esta semana ante dos importantes eventos de riesgo. El lunes, el Partido Democrático Liberal, en el poder, elegirá a su nuevo dirigente días antes de que la Dieta Nacional nombre a un nuevo primer ministro.

Tras la dimisión de Shinzo Abe por motivos de salud, el secretario jefe del gabinete, Yoshihide Suga, es el candidato preferido para ocupar su puesto. A pesar de que se postula como un candidato que garantiza la continuidad política y se ha comprometido a continuar con las políticas del Abenomics, existe el riesgo de que pueda convocar elecciones, lo que podría añadir un riesgo político al JPY y al Nikkei 225. No se prevé que las declaraciones del Banco de Japón al día siguiente del voto de la Dieta Nacional vayan a alterar esta situación.

Ganancias

En el índice FTSE, no perderemos de vista el martes a los resultados del 3T de Ocado, ya que los inversores querrán saber cómo se ha reflejado en las cifras el comienzo de la asociación con Marks & Spencer. Los inversores también querrán obtener una respuesta a la eterna pregunta: «¿dónde está el efectivo?». La cotización de Ocado se han disparado este año con el auge de la venta minorista por Internet. Con su rally superior al 80 % de este año, tan solo se coloca por detrás de Fresnillo en lo que respecta a los beneficios obtenidos en lo que llevamos de año.

Sin embargo, aún no ha generado ningún ingreso para los inversores mediante beneficios gratuitos.

Entretanto, el líder minorista Next (-16 % en el año hasta la fecha) ofrece cuantiosos resultados: aún con el colapso de las tiendas físicas, logra obtener flujos de caja libre. Este jueves conoceremos sus resultados semestrales. En julio, la empresa informó que, aunque las ventas a precios máximos en el segundo trimestre cayeron un 28 % con respecto al año pasado, este resultado superó con creces las expectativas y supone una mejora del escenario más halagüeño previsto en la declaración comercial de abril. Según la dirección, los beneficios del año antes de impuestos previsiblemente ascenderán a 195 millones de libras.

Lo más destacado en XRay esta semana

Descubra toda la programación de formación y los análisis del mercado financiero.

17.00 UTC 14-⁠Sep Blonde Markets
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Acontecimientos económicos clave

No se pierda las principales citas del calendario económico de esta semana. En la plataforma, encontrará un completo calendario económico y de acontecimientos corporativos. 

09.00 UTC 14-Sep Eurozone Industrial Production
01.30 UTC 15-Sep RBA Monetary Policy Meeting Minutes
02.00 UTC 15-Sep China Industrial Production & Retail Sales
06.00 UTC 15-Sep UK Unemployment Rate, Claimant Count Change
09.00 UTC 15-Sep Germany, Eurozone ZEW Economic Sentiment
After-Market 15-Sep Adobe – Q3 2020
After-Market 15-Sep FedEx
06.00 UTC 16-Sep UK Consumer Price Index
12.30 UTC 16-Sep US Retail Sales
14.30 UTC 16-Sep US EIA Crude Oil Inventories
18.00 UTC 16-Sep FOMC Interest Rate Decision, Economic Projections
18.30 UTC 16-Sep FOMC Press Conference
22.45 UTC 16-Sep New Zealand Quarterly GDP
01.30 UTC 17-Sep Australia Employment Change, Jobless Rate
04.00 UTC 17-Sep Bank of Japan Rate Decision & Statement
11.00 UTC 17-Sep Bank of England Interest Rate Decision
12.30 UTC 17-Sep US Weekly Jobless Claims
14.30 UTC 17-Sep US EIA Natural Gas Storage
23.30 UTC 17-Sep Japan Inflation Rate
06.00 UTC 18-Sep UK Retail Sales
12.30 UTC 18-Sep Canada Retail Sales
14.00 UTC 18-Sep US Preliminary University of Michigan Sentiment Index

Ocado and Next teasers: Why do investors pay so much for growth?

Why do investors continue to pay such a premium for growth? Let’s take two FTSE 100 retailers – Ocado and Next, both of which report their latest trading numbers next week. Ocado delivers Q3 numbers on September 15th, with Next following with its half-year results on September 17th. The two companies offer rather different entry points into the UK retail space. Ocado carries tech-level valuations, and has been touted as the Microsoft of retail, whilst Next is relatively unloved despite its very respectable omnichannel mix and successful switch to online that has not been mirrored by all its peers. The respective CEOs – Lord Wolfson at Next and Ocado’s Tim Steiner are also rather different characters.

Ocado – Where is the Cash?

Ocado (LON: OCDO) shareholders will be keen to hear how management think the Marks & Spencer tie-up has gone so far. Investors will also want the answer to the perennial question – where is the cash? It likes to raise fresh funds to pay for its global expansion – raising another £1bn in debt and equity in June this year – but is less keen on actually generating it.

Ocado’s share price has rocketed this year thanks to the boom in online retail. Its +77% rally in 2020 puts it behind only Fresnillo in terms of YTD gains on the blue-chip index. However, it’s yet to really deliver any returns to investors by way of free cash.

Earnings from international partners remain slow to emerge and in July management cautioned that EBITDA from International Solutions would decline due to ‘continued investment in improving the platform and building the business, and from increased support costs with launch of initial CFC sites’.

Booming retail sales in the UK (+27% H1) are priced in, as are sustainable fees from international partners. The latter carries considerable execution risk.

Next – Retail bellwether

Meanwhile, retail bellwether Next (LON: NXT) (-16% YTD) is a cash cow that even with a collapse in the high street consistently manages to deliver free cash flow. The pandemic has proved more challenging – suspending buybacks and dividends, and selling off assets have been required to shore up the balance sheet this year. But it remains a resilient company able to generate pre-tax profit. Its half year results follow on Thursday.

In July the company reported that while full price sales in the second quarter were down -28% against last year, this was far better than expected and an improvement on the best-case scenario given in the April trading statement. Management guided full year profit before tax at £195m based on its central scenario.

If we know anything about Simon Wolfson, it’s that he likes to under promise and over deliver – albeit there are risks, as Dunelm stressed today, that a second lockdown could damage demand going into Christmas. In the more optimistic scenario laid out in July, pre-tax profits would be £330m – we are yet to see if high street footfall has made a genuine difference.

After peaking in February at £1.15bn, under the central scenario Next expects net debt to close the year at £648m, which would be a reduction of £464m in the year.

Despite generating cash every year, Next’s share price has lagged Ocado’s significantly over the last 5 years.

And taking this simple peer analysis, on both return on equity and price to cash flow metrics, Ocado looks very richly valued.

(charts and data from Markets.com, Reuters Eikon)

The Hut Group float – quick take

The next Ocado or another Aston Martin? Online retail group The Hut Group (THG) plans to float on the London Stock Exchange. This is a major boost for the London market with the £4.5bn tag making this the biggest listing of the year.

A full seven banks/brokers are working on the deal, so good tidings all around the City. But what of the individual investor?

After a considerable ramp in tech valuations this year – eg, Ocado +100% in the last 12 months – this looks like a well-timed move, at least on the part of the founder who is due a bumper £700m payout should all go well and still remain very much in control. The question is whether this 10% margin business deserves a tech rating.

A standard listing makes it ineligible for inclusion on the FTSE index although its mooted market cap would be enough just to make the FTSE 100. Any standard listing raises eyebrows as it means no index inclusion and lower governance standards.

And we note that it’s another banker buffet – four of the same banks from Aston Martin’s listing are on the IPO – Goldman, JPM, HSBC and Numis (in addition to Citigroup, Barclays and Jefferies).

Indeed, Goldman’s Duncan Stewart and Anthony Gutman, named on the THG registration document today, were also down on the Aston Martin registration document in August 2018. Let’s hope THG enjoys a better time on the public markets than AML.

Is THG a tech company or a retailer?

THG describes itself as a ‘vertically integrated digital-first consumer brands group’, retailing its own brands in beauty and nutrition, including Myprotein and Lookfantastic, as well as third-party brands. It does this via a proprietary technology platform dubbed Ingenuity.

The business is divided into three core divisions – Beauty, Nutrition and Ingenuity. Whilst the Beauty and Nutrition brands have delivered strong growth, the real value in the shares may well come from the tech platform.

In 2019 THG achieved year-on-year revenue growth of 24.5% to reach £1.1 billion with adjusted EBITDA of £111.3 million. The float aims to raise £920m and would value the company at £4.5bn, which at c40x last year’s EBITDA and x4 sales doesn’t seem like too much to pay for this kind of growth….or does it?!

The answer rests surely on whether it deserves a techy or a retail multiple. Ocado trades in the region of x300 after an unbelievable rerating – but that is another story altogether. THG growth has accelerated in the first half of 2020, with revenue of £676 million, up 35.8% on the equivalent prior year period…but it’s all coming from the Beauty and Nutrition segments, not Ingenuity.

Ingenuity platform – a key growth driver?

Ingenuity has a capital-light, scalable licensing model that offers good revenue opportunity beyond the core retail division. Management are keen to stress that Ingenuity secured £215 million in life-of-contract revenue in the first six months of the year amid an uptick in demand.

Management view the platform as one of THG’s key growth drivers and as a fully scalable solution available to brands at a time of immense e-commerce growth – direct to consumer (D2C) in particular – it has strong potential. The prospectus outlines a target for overall revenue growth of 20-25% over the medium term, with Ingenuity forecast growth of 40% primarily as a result of increasing mix of e-commerce revenues as global brand owners accelerate their adoption of D2C strategies.

But revenues from Ingenuity remain relatively small – £61m in the first half of 2020, which was flat on last year and less than 10% of total group revenues. As a percentage of group revenues, the contribution from Ingenuity is going down. For the moment it looks like a retailer trying to pass itself off as a tech platform. Ocado has managed to pull this off – can THG?

JD Sports blasts CMA merger decision, Ocado sales surge, ITV jumps on solid online revenue

You can imagine the steam blowing out of Peter Cowgill’s ears as he heard the CMA decision… JD Sports says it – obviously – fundamentally disagrees with the CMA’s decision to block its takeover of Footasylum on competition grounds; a decision that was not so obvious. The CMA thinks the deal would leave shoppers ‘worse off’ and see fewer discounts and less choice in stores and online.

Mike Ashley will be delighted. The CMA has essentially agreed with the Sports Direct argument that the JD-Footasylum tie-up would lessen competition among key must-have brands like Nike and Adidas.  As previously noted, and as JD Sports was very keen to point out, with Footasylum having less than 5% market share you would have to question whether the CMA has got this right. However, in this case it was not about the overall market share, but the supply of certain key brands, and on that front JD Sports and Footasylum dominate so-called ‘must-haves’. Their combination  would have given them a powerful position in the market that a simple market share metric doesn’t quite explain.

Ocado sales soar, shares rally 3%

Ocado reports sales at its UK retail division are flying. This is good, but we all know online grocery demand spiked for a short period and let’s face it, Ocado and the rest have not been able to expand capacity fast enough. Try finding a slot earlier than 3 weeks from today and you will appreciate that the model doesn’t flex easily to meet great increases in demand. This is not necessarily a problem long term of course – more of a concern is how the M&S tie-up will affect sales.

Growth in retail revenue in the second quarter to date is 40.4% up on last year, compared to 10.3% growth in the first quarter. Management noted that the number of items per basket appears to have passed its peak as consumers return to more normal behaviour. Less loo roll, more fresh stuff.

And we all know the long-term investment thesis rests on the international deals. A key milestone has been achieved – the delivery of the first international CFCs to international partners Casino of France and Canada’s Sobeys. But payback from all this will be slow. In Feb management said they expect International Solutions earnings to decline due to continued investment in building the business, and increased support costs.

Structurally, Ocado looks perfectly placed to benefit from the new post-Covid-19 world. Shares, which have surged to fresh all-time highs, already reflect this but continued to rally today, up 3%.

ITV posts solid revenue despite coronavirus hit

ITV is on the other side of this, buffeted by long-term structural viewing shifts driven by cord cutters and the upending of the traditional advertising model by Google and Facebook. Covid-19 could not have come at a worse moment, but at least viewing figures are up as we all linger at home. Total advertising for the four months to the end of April was down 9%, driven by a 42% slump last month. The outlook for May and June is not great either. Q1 was actually pretty solid, with total advertising up 2% as originally guided, and online revenues up 26%. Total external revenue was down 7% at £694m, with Studios revenue was down 11% at £342m. Shares jumped 5%.

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