Ocado 'significantly overvalued' after hitting all-time high, says SocGen

Societe General sees Ocado shares as "significantly overvalued" after the online grocery group hit a new all-time high, reiterating its 'sell' rating.

The FTSE 100 company announced a sixth overseas deal on Tuesday, with Australia's Coles Group signing up for the Ocado Solutions platform and two of the massive robot-operated customer fulfilment centres in Sydney and Melbourne.

Looking back on the past 18 months, the French bank had "no difficulty acknowledging" that Ocado's technology is very efficient and that management has been "doing a good job" striking international partnerships in Europe, Canada and the US.

The key rhetorical question for SocGen, however, was "what is priced in already by the market?"

From a valuation standpoint, analyst Arnaud Joly gave a value for each international CFC of circa 15p per share "on the basis of favourable assumptions", ie a 5% fee on capacity and 100% capacity in the third year.

"At current share price levels, we calculate that the ‘market’ is factoring in circa 30 additional CFCs over and above the 25 already contracted for.

"So fundamentally we think the stock is significantly overvalued following a circa 60% jump since the start of the year," Joly wrote in a note to clients. He has a target price of 720p for the shares.

Joly also pointed out that Ocado's sale of 50% of its UK retail business to Marks & Spencer "did not have a surprisingly positive impact on the value" of the UK retail business.

Looking at the coming three or four years, with 25 CFCs to build all around the world, he said "execution will be key" and said, "in particular as it could have an impact on the group’s ability to seal more long-term deals".

Elsewhere, other were more positive, with Peel Hunt saying the Coles deal provides "further reassurance" after the Andover fire in February.

While the shape of the new deal is consistent with those previously announced, Numis saw it as "a strong endorsement" from a new partner already operating a material store-pick operation.

Barclays had a balanced view, saying "entering any new market must be incremental good news" but that at current share price levels "we think the valuation of Ocado already assumes a steady flow of transactions like this".

The Barclays analysts observed that the four years to open the two CFCs compares with a timescale of more like two years for its first international deals, which "may be a reflection of the increasingly long 'to do' list that Ocado is building up".

"If indeed it does reflect a degree of capacity constraint then it may mean that the rapid pace of announcements seen in 1H18 will not continue."