Citi tips Ocado for more success with automated online grocery offer

Ocado Group's automated warehouse solution and the company's long quest to sell this service to supermarkets around the globe has received backing from Citi, which initiated coverage with a 'buy' recommendation.

Citi, which set a 400p price target for the shares based on the one overseas deal signed so far, feels there is latent demand in the grocery market as the channel shift in retail towards digital that is well under way in other subsectors.

"Grocery has lagged – with complexity and challenging economics damping supply – but penetration is already 5-10% in the lead countries," Citi said, pointing to Wal-Mart, Kroger and Amazon increasing supply in North America.

The bank's base scenario is that Ocado will sign one new international client per year.

Ocado's provision of automation offers structural and cost advantages, Citi said, such as better freshness, availability and range, while the low-cost profile of Ocado’s automated CFCs is seen as its "key attribute".

Last year, Ocado’s store EBITDA margins were 10.1%, with its second-generation ‘Hive’ warehouses targeting circa 11.5% margins and an order pick time of 5-10 mins.

Analysts estimate Ocado will carry £37m cost and invest £60m R&D capex in 2017, calculating robotic picking alone would add circa 200 basis points of margin with around a year's payback on capex.

While store-based picking currently prevails in the industry, City expects the development of "better and cheaper technologies to increase automation throughout the grocery value chain".