A non-food acquirer could unlock substantial delivery savings
Source of opportunity
On Jan. 19, 2016, there was press speculation that Amazon might be looking to buy Ocado. While we take no view on the likelihood of such a deal occurring, we highlight the following: we view Ocado as an attractive M&A candidate, ranking it “1” in our departmental M&A framework; given its development of the Smart Platform, we believe Ocado is well placed to integrate itself into another retailer; finally, we believe Ocado’s unique online grocery solution would not only allow a non-food retailer to address a global market worth c.$6 trn, but potentially drive significant cost savings through the integration of food and non-food delivery routes.
Catalyst
Given the underperformance of Ocado’s shares, c.30% over the last 12 months vs. our pan-European food retail coverage (€ adjusted), we do not believe it would take much to drive outperformance from a stock now trading on 1.1x calendar 2017E sales. Key catalysts would be M&A news, the announcement of a Smart Platform deal, positive results/guidance at FY15E prelims to be presented Feb. 2 (GSe EBITDA: £81.2 mn).
Valuation
Our unchanged, two-year price target of 700p is based on a DCF valuation of the Ocado.com business and Morrisons contract (420p/share) and a DCF of our Ocado Smart Platform rollout estimates (280p). We remain CL-Buy.
Key risks
Key risks to our investment case include: material delays before Ocado can sign a Smart Platform contract and a further worsening in the UK grocery market.