M&S paying high price for being late to online food party, says RBC Capital

Online delivery specialist Ocado announced in February that it had agreed to sell M&S a 50% share in its UK retail business for up to £750m. M&S said at the time that it was slashing its dividend by 40% and planning a rights issue to raise up to £600m to pay for the £562.5m upfront portion of the deal.

The JV will trade as Ocado.com but have access to M&S's brand, products and customer database from the switchover date of September 2020, as Ocado's current deal with Waitrose is being terminated. The M&S-branded food and beverage range will be combined with Ocado's existing range of Ocado own label and third-party branded products to offer more than 50,000 products.

RBC said the JV with M&S is "additional validation of Ocado's best-in-class solution". However, this is fairly reflected in the share price. In addition, the bank said it was remaining on the side lines with its 'sector perform' rating in light of execution risk and lack of visibility on future cash flow.

It lifted its price target on Ocado to 1,000p from 750p. The bank said it values the JV with M&S at 230p a share on a discounted cash flow basis. It values the company's solutions business at 220p a share, reflecting the current deals with Morrisons, Bon Preu, Casino, Sobeys, ICA and Kroger and the Ocado Retail JV.

Finally, RBC said it was incorporating likely future deals in its valuation worth 520p by assuming Ocado can reach 15% global market share through it partners.

The bank, which also has a 'sector perform' rating on M&S, cut that price target to 270p from 300p as it reduces its FY20-22 earnings per share forecasts by around 10%, having taken a detailed look at the JV with Ocado.

"While we see some strategic benefits, we think M&S has paid a high price for being late to the party in online food, and we question whether it can retain the £70m of targeted synergies given potential need for price realignment," it said.

RBC also cautioned that this is the second time in 10 years that M&S has cut its dividend payout.

"Essentially M&S is moving from being a high yield no growth stock, to one with a more moderate yield (4%) but with some potential for EPS growth in the longer term, albeit the Ocado JV is unlikely to be material to the bottom line for several years."

At 1510 GMT, M&S shares were up 0.1% to 265.60p and Ocado shares were 0.4% firmer at 1,058p.