Ocado slumps on UBS downgrade to 'sell'

Ocado slumped on Friday as UBS downgraded the stock to 'sell' from 'buy' and slashed the price target to 200p from 425p saying that meeting consensus revenue and margin expectations will be tough.

UBS said technology leadership has seen Ocado evolve best-in-class operational efficiency, reducing the cost of online grocery to profitable levels and underpinning a superior customer offer.

"We believe its flagship customer fulfilment centre (CFC) in Erith, opening 2018, could generate an impressive 22% internal rate of return and has potential to drive earnings and a cashflow inflection. However, we believe the market is moving against Ocado, presenting roadblocks to such a scenario."

The bank said growth rates in online grocery have slowed markedly (just when Ocado is bringing new capacity to market), and the company may struggle to maintain price competiveness in an inflationary environment. "We see this as a tough juggling act," it said.

UBS said Ocado's low price promise sees it price-match market-leader Tesco on everyday items, but it pointed out that Tesco is reinvesting volume gains and has committed to shield customers as far as possible from inflation.

"This, combined with, we assume, weaker terms of trade at Ocado (similar to Waitrose), could see LPP become a burden."

At 0920 BST, Ocado shares were down 4.7% to 240.20p.