Berenberg hikes target price on Ocado, reiterates 'top pick' rating

Analysts at Berenberg hiked their target price on food retailer Ocado from 1,725p to 2,225p on Monday, citing substantial retail growth on the back of accelerated capacity installations.

Berenberg said Ocado's second-quarter retail growth of 40% was "substantially ahead of guidance", driven by accelerated capacity installation to meet the surge in online grocery demand in the wake of the Covid-19 pandemic.

The German bank noted that despite coronavirus-related cost headwinds, the group continues to expect operating leverage at its retail business, highlighting the benefits of automated online grocery solutions.

"While this has positive read-across to Ocado's UK retail business, the positive impact on its technology business, Ocado Solutions, is even greater," added the analysts.

Berenberg said the surge in online grocery demand globally would result in Ocado's international partners requiring installed capacity at their centralised fulfilment centres to be accelerated and require faster ramp-up to full capacity.

"This accelerates the revenue stream of each [customer fulfilment centre], increasing the valuation of each CFC deal," said Berenberg.

Berenberg, which reiterated the firm's shares as its top pick in the space, added that concerns about M&S's digital transition were "overdone" and that Ocado had "a far superior online proposition versus its peers". It also said Waitrose lacked the "financial flexibility" to invest online.