Ocado FY 2021 in Line With Capex, EBITDA Guidance Disappointing; New Features Promising; Shares Cheap

Ocado reported fiscal 2021 results, with group revenue at GBP 2.5 billion and EBITDA at GBP 61 million broadly in line with company-compiled consensus. Ocado Retail (joint venture with Marks & Spencer) and the U.K. solutions and logistics segments reported higher EBITDA in fiscal 2021 at GBP 150.4 million and GBP 68.5 million respectively, with the international solutions segment posting a GBP 119.3 million loss. On guidance, management expects Ocado Retail to return to strong midteens revenue growth in 2022 but the surprise (downside) was capital expenditure (GBP 800 million in fiscal 2022 versus 680 million in our model, largely due to a ramp-up of international CFCs) and EBITDA, and more specifically the international solutions business with Ocado now expecting EBITDA to be flat versus 2021 (GBP 119.3 million EBITDA loss versus GBP 80 million loss for company-compiled consensus) as "higher-margin contribution due to revenue growth will be offset by increased investments in platform development and engineering costs" required to support new CFCs in the early stages of launch. Ocado previously hosted an event (Ocado Re:Imagined) showcasing its industry-leading online grocery technology, highlighting six new developments partners will be able to benefit from including better economics. Although these new features look promising to us (units per hour, a measure of CFC productivity expected to reach and exceed 300 from a current target of 200 and 170 in fiscal 2021, time for installation and testing to shrink to five months, from 10 months among others) and reflects Ocado's unique drive for innovation in the online grocery segment, we believe it's early days and don't include these in our forecasts (new series 600 robots at preproduction phase). We expect to reduce our GBX 1,870 Ocado fair value estimate by a high-single-digit percentage after incorporating fiscal 2022 guidance (lower EBITDA for international business and higher capital expenditure) in our model.