Grocery retailing is a competitive business, run on tight margins, writes Rosie Carr.
That’s not going to change, given that discount supermarkets Aldi and Lidl have opened close to 2,000 stores between them in the UK; the two largest listed grocers, Tesco and Sainsbury, have long given up their store expansion ambitions, given the costs, risks and uncertain footfall.
But that doesn’t mean the big brands are willing to forgo growth. Winning market share from rivals including Asda and Morrisons, and getting customers to put more items into their shopping baskets, matter more than ever. Loyalty cards and product ranges to suit all customers are helping them to do this.
Against this backdrop, Ocado, the young cuckoo in the sector, presents an entirely different investment story. The hybrid technology food retailer is admired by many for its groundbreaking robotics technology deployed across its warehouses and ability to sign deals with partners around the world. Others deplore its tendency to deliver more legal battles than pre-tax profits, its repeated requests for funding and its penchant for burning through cash as it builds new customer fulfilment centres.
The company reported unexpectedly good results this week, but that may not be enough to overcome investor exasperation, especially as some overseas partners are pausing their expansion plans. Something may have to give eventually and one option being voiced among City brokers is a buyout of the grocery business. Certainly, from an investor perspective, pure plays Tesco and Sainsbury may be staid in comparison, but they are delivering the goods that investors want: profits, dividends, growth and buybacks.
BUY: AJ Bell (AJB)
The market reacted positively to AJ Bell’s third-quarter update as net fund inflows continue to impress, writes Mark Robinson.
Customer numbers increased by 25,000 in the quarter to close at 528,000, a 13 per cent increase on the corresponding period in 2023, while direct-to-consumer customers stood at 360,000, up 17 per cent in the past year and 7 per cent over the quarter.
The new business inflows and favourable market movements combined to drive assets under administration up by a fifth to £83.7bn. Management highlighted the improved contribution from AJ Bell investment solutions.
Michael Summersgill, chief executive of AJ Bell, said the investment platform’s “strategy of serving both the advised and D2C markets helped us to attract a significant number of new customers and assets from both subsectors of the growing platform market”.
The imperative to secure new business has never been greater as relatively mature industry participants respond to tighter regulation and intensifying competition.
Market share and margins are under pressure, while management is also under pressure not only to alter charging structures, but to provide more transparency as to client funds held as cash. The latter point relates to the interest rate margin — the difference between the payment rate to clients on cash held and what platforms gain from depositing it at the overnight financing rate.
AJ Bell increased its payable interest rate at the tail-end of last year, and has lowered charges in response to online market disrupters such as eToro. These moves appear to have had the desired effect, at least judging by the Q3 update.
AJ Bell carried momentum into the final quarter and Summersgill maintains that the platform’s dual-channel strategy and continued investment puts it in “an excellent position to capture further market share gains”.
In a sense, the experience of AJ Bell and its industry cohort underlines how customers benefit from innovation and intensifying competition.
SELL: Ocado (OCDO)
The company may need another capital injection and has £1.5bn of debt to refinance, writes Christopher Akers.
Ocado shares rose 9 per cent after the grocery tech business increased its annual guidance and cut its half-year loss, but they have been volatile this week after plunging on the day before the results following a brutal analyst note.
Revenue progress was driven by double-digit growth at the retail joint venture with Marks and Spencer and the technology solutions business. Sales climbed 11 per cent and 22 per cent, respectively, while the logistics unit posted an uplift of 6 per cent.
Adjusted cash profits rose from £16.6mn in the interims last year to £71.2mn, and the statutory loss significantly narrowed.
While Ocado is still burning through cash, management now expects the outflow to improve by £150mn this year, rather than the £100mn previously guided. It also forecasts that the technology solutions cash profit margin will be in the mid-teens this year, up from the previous position of around 10 per cent. Elsewhere, the annual capex spend forecast was cut from £475mn to £425mn.
There has been mixed news this year on the rollout of the company’s customer fulfilment centres (CFCs). Canadian supermarket Sobeys paused an automated warehouse project in Vancouver, and Kroger closed three sites where it had partnered with Ocado. On the other hand, a third CFC with Aeon will be built in Japan, and CFCs in Madrid and Australia should go live in the second half as planned.
The shares fell 11 per cent on July 15 when broker Bernstein, self-described as “one of the last [Ocado] bulls standing”, slashed its target price from 1,000p to 260p. Analyst William Woods said the business “will need significant additional capital (£500,000-£1bn)” over the next few years, and he urged management to consider selling the company and cutting tech overheads by 30 per cent.
We remain bearish, although reiterate that a bid could materialise.
HOLD: Gateley (GTLY)
There have been all sorts of indications that companies have reined back on using professional and consulting services over the past couple of quarters, writes Julian Hofmann.
The full-year results for Gateley seemed to confirm that trend, with organic revenue growth registering at 2.8 per cent, after the impact of acquisitions are stripped out — roughly half the rate the group reported at the interim stage.
Luckily, the market was braced for an average set of results and the share price rose on forecasts being confirmed, rather than expectations being dashed. Some of its profit fall was down to remuneration choices; the board made the decision to set aside £4.5mn to pay for employee bonuses. The extra staff costs, which also reflect higher average headcount, meant that personnel costs as a proportion of sales were well on the way to 63 per cent.
Operationally, the best segmental performance was in business services, which offers clients management of their commercial agreements. Revenues here rose by 14 per cent to £24.9mn, as more overseas clients looked for dispute resolution services in the UK.
By contrast, a subdued year for the corporate platform meant that revenues for this division, which offers corporate, financial and business support services, were 4.4 per cent lower at £37.1mn. Despite a subdued property market, revenue for the property platform grew by 11.4 per cent to £91mn.
Broker Panmure Liberum said there were “green shoots” in the results, particularly for the top line. The broker rates the shares at 9.8 times earnings for 2025, with an expected dividend yield of 6.9 per cent. We still think there is too much volatility in the professional services sector to risk an upgrade.
