Ocado growth plans singed as fire blazes through night

The FTSE 100 group, which has sold the model of its high-tech 'customer fulfilment centres' in multi-million-pound deals to supermaket groups around the world, said the fire that started on Monday night had spread over Tuesday and was continuing to burn on Wednesday morning.

In spite of the efforts of the fire brigade, part of the roof collapsed during the night and there has been "substantial damage" to most of the building and contents.

As Andover, the third newest of the company's four CFCs in the UK and the first to use robotics, was recently providing around 10% of total group capacity, the fire damage is certain to constrain Ocado's ability to meet customer demand, it said.

Having suspended order fulfilment from the site, the company, only a day after reporting its annual results, said "there will be a reduction in sales growth until we can increase capacity elsewhere".

Having been up running for the whole of last year, Andover had begun testing robotic product-picking toward the end of last year with the aim of starting to use it in live production this year.

Having first been reported in the early hours of Tuesday as a small fire in a corner of its room-temperature section, the blaze was "not contained as we believed", Ocado said.

Hampshire Fire & Rescue Services said the fire was now "under control and is no longer a major incident", confirming that no members of the Ocado team or the public have been injured.

"Once we have had time to assess the damage and prepare a plan to return the CFC to operation we will update further as appropriate," the company said, adding that it has comprehensive insurance for the property, stock and equipment on site, and for business interruption losses.

45P7 now returning to station after a very challenging few hours at the Commercial Building Fire on the Walworth Industrial Estate, Andover. pic.twitter.com/wwjHNV59xg

— Ringwood Fire Station (@RingwoodFire) February 6, 2019

It’s going to be a loooong night.. 🔥 #AndoverFire #Ocado #MajorIncident #WalworthIndustrialEstate @Hants_fire @hfrs_control @DWFireControl @DWFireRescue pic.twitter.com/nEjOU2PqIf

— Lottie (@lottielouises) February 6, 2019

Shares in Ocado fell more than 6% to 970.4p on Wednesday morning.

Broker Peel Hunt said it was downgrading its recommendation to 'hold' and its target price from £17 to £10 until it got a better idea of the outcome of the fire.

Analyst James Lockyer said that as the damage has been worse than first reported "this is likely to have a substantial impact on its Ocado.com customer experience and, whilst it is covered by insurance, could do lasting damage over at least the next 12 months".

Lockyer said "our core thesis licencing the technology to food retailers around the world has not changed".

Berstein's Bruno Monteyne offered a few ways to look at the news, firstly that it is a "material dent" in the UK retail business of around 10% but "probably less as other warehouses are scaled up".

"For those investors who mainly value Ocado as a technology business, this 10% dent in the near term, should not make a huge difference," he said, though acknowledging that it was unclear whether the cause of the fire "has any implications for the technology platform itself".

He noted that chief executive Tim Steiner had a day earlier mentioned a new generation of robots that will be able to identify leaks and should reduce the need for specialist engineers on site.

Monteyne said the 8% share price drop, for a near term 10% cut in capacity "in the least valuable part of the business" seems a big over-reaction and "therefore provides another opportune entry point for the Ocado tech investment case".

Andrew Gwynn at Exane said there was third, even more positive, way of viewing the news, though he cut his price target on the shares to 700p from 800p.

"The prospect of Ocado delivering EBIT short-term was remote and has become even more so," he said. "Many readers will question whether that matters; the group has just signed up some of the biggest retailers in the world to its ‘smart platform’. Further, the application of IFRS-15 (revenue) means that revenue from those contracts is deferred even if the start-up costs aren’t. So perversely, the worse profit is, the better it is for the equity story."

As the company's cash flow "is another story", he saw more cash burn than previously expected, explaining his price target cut.