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Ocado to secure more partnerships after bagging deal with Sweden's ICA, says Numis

Published: 20:13 02 May 2018 AEST

Ocado
Numis expects cash outflows will be higher for the ICA deal compared to previous ones

Ocado Group PLC (LON:OCDO) will likely continue to win more deals after striking a partnership with Sweden grocery retailer ICA Group, according to analysts at Numis.

The UK company on Wednesday announced a deal to develop ICA’s online delivery services and mobile app using its smart platform.

READ: Ocado shares jump as it lands deal with Sweden grocer ICA

Shares rose 1.9% to 566p in late morning deals. 

ICA deal 'encouraging', says Numis

Numis upgraded its rating on the stock to ‘buy’ from ‘add’, saying it believes Ocado is building a “very valuable business”.

“This is clearly another encouraging piece of news for Ocado, representing its third recent major OSP (Ocado Smart Platform) deal – our long-held views, that 1) central fulfilment is the most efficient model at scale, and 2) Ocado has the best end-to-end solution for third-party grocery retailers, are being repeatedly endorsed by a series of major international retailers,” the broker said.

“With the industry evolving rapidly, grocery retailers are having to make big decisions on how to adapt (see Sainsbury/Asda), and Ocado is offering the best in-class solution to address the online issue.”

As part of its deal with ICA, Ocado will also develop an automated warehouse in Greater Stockholm, which will take three years to build.

The group said it will incur “minimal” capital expenditure (capex) in fiscal year 2018 but there will be additional capex in future years to support the build of the customer fulfilment centre.

ICA deal 'more complex' than Ocado's previous partnerhips 

Recent deals Ocado has secured include a partnership with France's Group Casino and another with Sobeys of Canada.

Numis said a major difference between its deal with ICA and previous ones is the level of complexity involved.

ICA is a co-operative association with independent retailers, each of which owns an operates their own stores.

Ocado will therefore need to adapt its smart platform to suit the needs of the co-operative business model, Numis said.

“Reflecting the relative complexity of the deal, we expect Ocado’s cash outflows and subsequent fee income to be at higher levels than the deals with Sobeys and Casino, but suspect the net peak cash flow outflow will be similar (c.£30mln),” Numis said. 

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