Ocado - comment

We are puzzled by the fall in share price after the results and call. We do think that management may fill any funding gap with debt rather than equity, but that will eventually be a cost decision. There are c£400m of maturities (£173m Convert in Dec 2025 and £224m SUNs in Oct 2026) in the near-term, and management suggested they may use the bond market rather than the convertible market. As we said yesterday morning, we think Ocado needs up to £300m more cash before it becomes free cash flow generative, particularly as the Rating Agencies do not want to see cash balances <£500m during the rollout phase. The coupons will be high but may be cheaper than equity or equity-linked issuance. The updated rollout forecast for Technology is broadly in line with our expectations. However, the equity has reacted badly to some changes in the expected timing of clients taking delivery of modules. The changes look modest vs. our model. We think both the M&S JV (and possibly the Morrisons JV) should eventually be sold to the respective partners, and on the call, management said they were not in any hurry but would not stand in the way. The write-down of the contingent payment from M&S to zero (from £29m) surprised us. We are updating our model and will be in contact with you all soon.