Macquarie starts Ocado at 'outperform', says market underestimating leverage

Macquarie initiated coverage of Ocado at ‘outperform’ with a 410p price target, saying the market is significantly underestimating operating leverage in the company’s business model.

“We think conservative company guidance on operating costs is holding back the market,” it said.

It noted that in its first-half results, Ocado set the bar low, guiding to +100-200bps long-term margin from warehouse and delivery efficiencies. Macquarie said a lack of clarity on timing or further upside has put a lid on expectations, adding that Ocado has a history of setting itself very beatable targets.

The bank said its analysis suggests +270bps margin improvement by full-year 2019 is easily achievable, nearly double the midpoint the market is pricing in.

In addition, Macquarie said significant start-up costs are masking operating leverage.

It said the Ocado Smart Platform, subscale non-food business, and preparation for cosmetics site launch all penalise the company’s admin expenses, where Macquarie believes it is achieving significant operating leverage on an underlying basis.

“As the above reach scale/OSP deals bring in fees, this should then be reflected in leverage on total admin expenses,” it said.

Consensus has just +90bps EBITDA margin improvement for 2016-2019, implying the market is not modelling any leverage here, the bank added.

At 1000 BST, Ocado shares were up 0.1% at 332.50p.