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.

Volgende week: Veel nieuws van centrale banken, maar de sleutel ligt bij de fiscale reactie

Het is spitsuur deze week wat betreft de centrale banken; de Federal Reserve, Bank of England en Bank of Japan komen in actie, na de ECB en Bank of Canada afgelopen week. Het besluit van de Bank of Japan wordt wellicht overschaduwd door de Japanse politiek, nu de Liberale Democratische Partij (LDP) een nieuwe leider kiest, vlak voordat een nieuwe premier wordt gekozen.

Intussen houden we onze ogen ook gericht op de wekelijks terugkerende economische data, zoals de uitkeringsaanvragen en retailcijfers.

FOMC

De Federal Reserve vergadert op 15 en 16 september voor de eerste keer sinds Jerome Powell aangaf dat de centrale bank bereid is hogere inflatie te tolereren in ruil voor sneller economisch herstel en banengroei. De werkloosheid is gedaald na de piek van de pandemie, maar het herstel gaat te traag.

De Fed zal naar verwachting geen nieuwe beleidsverandering aankondigen, maar de boodschap van Powell versterken. De belangrijkste focus van de Fed ligt inderdaad niet bij het monetaire beleid maar bij het fiscale, nu leden wachten op beweging uit Washington met betrekking tot een nieuw stimuleringspakket.

Bank of England

De Bank of England vergadert ook deze week, te midden van groeiende speculatie dat de “Old Lady of Threadneedle Street” zal overgaan tot negatieve rente om de economie te stimuleren.

In gesprek met parlementariërs weigerde gouverneur Andrew Bailey negatieve rente uit te sluiten – een beleid dat systematisch faalde met betrekking tot de vereiste inflatie in de eurozone. “Het zit in de gereedschapskist,” zei hij. “We hebben het nu niet in de planning staan, we zijn niet van plan het op korte termijn in te zetten, maar het zit in de kist.”

Intussen is het de fiscale reactie die er op dit moment meer toe lijkt te doen – centrale banken hebben hun munitie al grotendeels verschoten. Andy Haldane, hoofdeconoom van de BoE, waarschuwde vorige week dat de verlofregeling in het VK niet verlengd moet worden – maar het is afwachten of de minister van Financiën toegeeft aan verzoeken tot verlenging om banen te beschermen. De verlofregeling loopt in oktober af en de regering zal zich misschien gedwongen zien hem te verlengen, om te voorkomen dat banen in een afgrond verdwijnen.

Focus op de Japanse yen

Met twee aankomende risico-events, is er een goede kans dat de Japanse aandelenmarkt en de yen deze week verhoogde volatiliteit laten zien. Maandag kiest de regerende Liberale Democratische Partij (LDP) een nieuwe leider, enkele dagen voordat een nieuwe premier wordt gekozen door het parlement.

Shinzo Abe trad onlangs af om gezondheidsredenen, en kabinetssecretaris Yoshihide Suga is zijn gedoodverfde opvolger. Hoewel hij kan zorgen voor continuïteit en heeft beloofd de Abenomics voort te zetten, bestaat het risico dat hij verkiezingen uitschrijft, met politiek risico voor de JPY en Nikkei 225. De verklaring van de Bank of Japan, de dag na de stemming in het parlement, zal waarschijnlijk weinig deining veroorzaken.

Winstcijfers

Wat de FTSE betreft, zijn de derdekwartaalresultaten van Ocado dinsdag interessant. Investeerders zullen graag willen weten hoe de samenwerking met Marks & Spencer heeft uitgepakt. Investeerders zullen ook het antwoord willen op de altijd blijvende vraag – waar is het geld? Het aandeel Ocado schoot dit jaar omhoog als gevolg van de stijging van online aankopen. Met een stijging van meer dan +80% in 2020 laat het bedrijf alleen Fresnillo achter zich als het gaat om de YTD-koers.

Die groei heeft zich echter nog niet vertaald in rendement voor investeerders door middel van winstuitkering.

Retailer Next (-16% YTD) is intussen een melkkoe die zelfs met de leegloop van de winkelstraten consistent een vrije cashflow laat zien. Deze halfjaarresultaten volgen donderdag. Hoewel het bedrijf in juli een verkoopdaling van -28% in het tweede kwartaal ten opzichte van vorig jaar rapporteerde, was dit veel beter dan verwacht en een overtrof dit het best-case scenario waar in april van uitgegaan werd. Het management schatte de winst vóór belasting op 195 miljoen pond.

Hoogtepunten op XRay deze week

Bekijk de volledige agenda van financiële marktanalyses en trainingen.

17.00 UTC 14-⁠Sep Blonde Markets
From 15.30 UTC 15⁠⁠-⁠⁠Sep Weekly Gold, Silver, and Oil Forecasts
13.00 UTC 16⁠⁠-⁠⁠⁠⁠⁠Sep Indices Insights
14.45 UTC 17⁠-⁠⁠⁠⁠⁠Sep Master the Markets
17.00 UTC 17-⁠⁠⁠⁠⁠Sep Election2020 Weekly

Belangrijke economische agendapunten

Kijk uit naar de belangrijkste economische agendapunten deze week. Een volledige kalender met economische en corporate events is beschikbaar op het platform. 

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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