Ocado - comment

Kroger’s closure of three sites was at the worst end of our expectations. The closure fees from Kroger for the CFC closures imply a valuation of £1.3bn for the 123 modules Ocado has installed (globally), which implies a minimum of £200m of equity beneath the bonds, even if the CFC concept is abandoned wholly. Our core thesis remains that Kroger is an outlier. Although we are going to look at potential growth in the sector again. 

Ocado has now confirmed the lost revenue at $50m pa (we had estimated $42m), and the compensation for the site closures is $250m (our estimate was $260m). We estimate 20 modules are being shut down, with an average of 7 years of fee revenue being lost. The PV of the stream is $250m (assuming 10% cost of debt is used), representing a 5x multiple. Ocado has 123 operating modules. At $70m capacity per module, a 3% annual capacity fee and a 5 multiple => £1.3bn in value vs net debt of £1.1bn.

 https://www.ocadogroup.com/investors/regulatory-news

Kroger’s decision to close three of its eight Ocado CFCs represents about 40% of the installed base and is at the worst end of what we expected. We are still a little confused about how Kroger thinks the store collection model will work. In-store fulfilment is the least efficient way of fulfilling customer orders, but it is a quick fix, as the Apps are paying for the infrastructure and providing the service. Will this last? Finding a new way to extend the online business with someone else (the Apps) paying is probably a good approach in the short term. Ocado stock was down 16% yesterday, but the bonds were more stable. The equity story will come under pressure, but I suspect a lot of the Kroger issues are specific to the company. 

Kroger has been looking for a new strategy since the FTC killed the Albertsons merger, which would have created a competitor of similar size to Walmart (4,600 stores). 

Kroger will take a $2.6bn charge against the CFCs

Rental                                                  $300m PA (10-year initial term)

Cost of Debt                                        6%

% of estate being shuttered           40%

Initial lease                                          10 years 

FV at 10 years                                     $6500m (21 years of rental), this is an assumption

PV = $5.9bn 

$2.6bn = 45% of PV