Ocado shares fall on Deutsche Bank downgrade

Deutsche Bank on Wednesday downgraded its rating on Ocado Group to ‘sell’ from ‘hold’ and reiterated a target price of 220p after the online supermarket issued a cautious outlook on margins.

Ocado last Tuesday warned that the supermarket price war has been eating into profit margins as it reported its third quarter trading update

“As the market remains very competitive, we are seeing sustained and continuing margin pressure,” the group’s chief executive, Tim Steiner, said.

The company reported a 19% increase in orders to 226,000 but the average value of each order fell 3.4% to £107.94.

Following the trading update, Deutsche Bank has kept its full year earnings before interest and tax forecast of £21m, 12% below consensus.

The bank noted that Ocado’s rival Tesco has experienced slowing online growth, driven by an increase in the minimum basket size for free delivery to £40 from £25, along with a rise in delivery fees. Tesco’s online market growth has fallen to 7% in the first half of 2016 from 15% in the first half of 2015.

“Ocado is benefiting from a less competitive Tesco but based on our Ocado profit forecasts, the incremental basket is not profit enhancing, under either model,” Deutsche Bank said.

“While we recognise the difficult industry backdrop driving gross margin pressure is outside of management’s control, we don’t expect this to change."

Deutsche Bank added that Tesco’s situation is significantly more material to Ocado’s near-term performance than the launch of Amazon Fresh in London.

“That Ocado cannot deliver profit improvement in this environment confirms our long held view about the challenge of profitably growing the market with incrementally smaller baskets under the Ocado model.”

Shares fell 1.30% to 265.30p at 1023 BST.