Ocado fire continues to burn for third day

Ocado shares dropped 10% on Thursday as the fire at its high-tech Andover warehouse continued to burn for a third day, with local residents having to be evacuated due to clouds of burning chemicals.

Hampshire Fire & Rescue Service said on Thursday that the fire was still being fought at the site but was under control and that the evacuation zone for residents around the Walworth Industrial Estate, which had been put in place by police due to “concerns over the presence of pressurised refrigerants on site”, had been lifted.

Drone footage showed substantial damage to the site, while photos on Twitter from locals showed the plume of black smoke darkening the sky for miles around.

The drones are up, we hope our friends at Ocado are okay. This is an intense fire.🔥😳 #OcadoFire #ocado pic.twitter.com/kiObxQsbAb

— Stack (@stacktel) February 7, 2019

With emergency services alerted to the conflagration at around 2.30am on Tuesday, more than 200 firefighters tackled the blaze at its height on Wednesday night, with fire brigades drafted in from neighbouring counties to help work around the clock.

One of four main UK warehouses, the Andover depot, or 'customer fulfilment centre' in the company's language, had been processing around 10% of the orders from Ocado.com until operations were suspended on Tuesday.

Back at the Ocado fire in Andover. Still many hotspots and lots of work to do. This clip shows the size of the building and the scale of the damage @Hants_fire pic.twitter.com/h2iJst3CxG

— Andy Bowers (@AndyBowersB006) February 7, 2019

The FTSE 100 company confirmed on Wednesday that part of the roof had collapsed overnight and there was "substantial damage" to most of the building and contents.

A ONE-OFF OR SOMETHING MORE SIGNIFICANT?

Ocado shares were down 10% to 870p on Thursday, down around 16% from the five-month high above 1,000p after Tuesday's final results, suggesting some investors saw the incident as having potentially wider consequences.

Analysts at Barclays said, while the fire "may simply be a very unfortunate and isolated incident, existing and potential partners could be forgiven for taking a close interest".

While Ocado is likely try to divert its demand into its other CFCs, but Barclays said "for those partners who have ordered just one (Casino, ICA, Sobeys) there would be a major problem if their sole CFC was disrupted due to fire (or indeed other reasons). It is not inconceivable that the CFC design has to be improved from a fire protection perspective, which could delay the construction of ordered CFCs and delay the addition of new partners."

Bernstein's Bruno Monteyne was confident that the robot-operated grid concept that has been sold to the Casnino and Sobeys is not the cause.

"Packaging machinery is old-world technology. Whilst it shouldn’t go up in flames, it does seem plausible that hot plastic, as part of the packaging, could catch fire. That would not be a risk at the robotic centers that Ocado sells and surely would be easily fixable," he said in a note to clients.

He added that if there were a structural problem in the design, "it would have been causing distortion problems well before this fire started. The fact that the CFCs were able to scale up so quickly and run for so long without such distortions, suggest to us that this is not a structural problem in the CFC design."

Monteye considers the share price drop a "massive overreaction" that "provides a new entry point for investors".

James Lockyer at Peel Hunt said that the fire may have caused short-term disruption but it has "given Ocado an opportunity to raise the bar even further", pointing to decisions made following fires at ASOS and Northgate Information Systems in the past.

"With a supportive shareholder base, Ocado must now take the findings of the investigation into those events and supercharge its operation. We take great solace in that it can do that now."

With only 10% of its orders processed via Andover and the UK retail operation arguably only 20% of the current equity value and the CFCs for its new overseas partners for its Solutions division yet to be completed, he believes that such a supercharging will allow it to "future proof itself further" for a longer-term outlook when eventually 100% of orders on Ocado.com go through its automated warehouses and the same for international clients.