Ocado Group PLC (LON:OCDO) shares not only have outperformed all other blue chips so far in 2020 with a 50%-plus gain since the start of the year, but they are still undervalued, according to analysts at Berenberg.
While the growth of its Ocado Retail joint venture with Marks & Spencer of around 40% was well ahead of guidance, as the business accelerated capacity installation to meet the surge in online grocery demand from the coronavirus lockdown, the impact on Ocado Group’s technology business, Ocado Solutions, is “even greater”, the analysts said in a note to clients on Monday.
“The surge in online grocery demand globally will result in Ocado’s international partners requiring installed capacity at their CFCs [customer fulfilment centres] to be accelerated and require faster ramp-up to full capacity.”
While this faster ramp-up will of course increase short-term costs, the German bank’s analysts said the accelerated revenue stream increases the present value of each of these robot-operated warehouses.
As a result, Berenberg’s financial model for Ocado was updated for each CFC to reflect the accelerated installation, now valuing each of the depots at £102mln, up from £75m previously.
This new CFC valuation implies an enterprise value for Ocado of eight times recurring sales, which if Ocado is classed as an IT service and software company rather than a retailer, means the shares are trading at around 20% discount to the sector, with the analysts noting that large IT and software companies on average trading at roughly a 10x EV/recurring sales multiple.
This led Berenberg to raise its base-case price target to 2,225p, with Ocado remaining on of the bank’s “top picks”.
Published at Mon, 11 May 2020 13:02:00 +0000-Ocado’s value given a boost as analysts crunch numbers of online grocery surge