Competition from Waitrose and Amazon adds to questions over Ocado’s valuation and profitability
The City has highlighted the risks surrounding Ocado’s prospective IPO, as the etailer starts its investor roadshow this week with the aim of a post-float valuation of between £800m and £1.2bn.
Oriel Securties analyst Jonathan Pritchard said Ocado faced a big threat from Waitrose starting to operate within the M25. “No matter what Ocado says, that will make life tough for them,” he said.
Ocado has always insisted it and Waitrose can operate side by side, and points out the joint benefit of its sourcing agreement.
One analyst said because Ocado has highlighted in its list of risks that it may need to raise further funding from 2012, this would be a worry for investors and “that could impact who wants to invest first”.
However, one source said if Ocado keeps growing at its current pace, it will soon become cash generative and efficiencies will come from its planned second depot.
Ocado has set a price range of 200p to 275p a share for its IPO. It wants to raise £200m in new shares to fund expansion. The deadline for applications from customers and employees is July 18, for investors it is July 20 and it is then expected the final share price will be announced on July 21. It expects to float on or around July 26.
In its research note to analysts, JP Morgan Cazenove said delivery costs have been falling as a percentage of sales and have reduced from 14.7% in 2007 to 12.9% in 2009. It estimates to achieve its target rate of 175 drops per week by the end of 2013 would result in a 31% reduction in the delivery cost per order, which is key to achieving profitability. It said the efficiencies would also increase with the second depot.
Most analysts say £200m is not a lot to ask for but predict the valuation may come in at the bottom end of the scale. Ocado is profitable at EBITDA level but not a pre-tax level. Most of the analysts advising it expect it to make a profit in 2011.
Ocado’s IPO comes as etail giant Amazon launches food in the UK, a move first predicted by Retail Week in January 2009. Amazon has launched with 22,000 grocery items including branded items and more niche products such as speciality international foods.
Amazon’s move could be seen as a threat to Ocado’s IPO. Oriel Securties analyst Jonathan Pritchard said: “Amazon is a great retailer and this will be further competition but it’s not a full grocery shop.”
Questions have also been raised about the Amazon offer as there are no timed delivery slots and some items have to be bought in bulk.