Ocado Trading Update, Coronavius Apps, EMIS AGM, IDOX Pay, Segro Dividends

Ocado (OCDO) issued a trading update today, and it shows their joint retail venture with M&S is benefiting from the coronavirus epidemic. In the second quarter revenue was up 40% on the prior year. They have had to ramp up capacity significantly to meet this demand, and they have suspended delivery of mineral water so as to cope with the needs of additional households. The announcement gives the distinct impression that they need more warehouses (or CFCs as they call them).

On a personal note, my family has been using Sainsburys’ on-line delivery system and as a “vulnerable” person we get priority. The result has meant neighbours asking us to shop for them. But at least I don’t need to accept the offer of food parcels sent to me yesterday by the local council!

There has been good coverage of coronavirus apps in the national media in the last couple of days. This UK Government has chosen one that relies on a centralised system and it looks distinctly insecure and not good enough to protect privacy. Robert Peston pointed out another flaw in it that someone could maliciously chose to report themselves as suffering from symptom thus causing everyone they might have come into contact with in the last two weeks to self-isolate. I am not at all clear why the Government has chosen this approach, which may deter take-up anyway, when Google and Apple are implementing a different system with fewer privacy concerns. That has been adopted by other countries so there will be problems with international travel.

EMIS (EMIS) held their AGM today. Nobody allowed to attend and no on-line session which is not good enough for an IT company. EMIS operates in the healthcare sector. Recurring revenues have held up but new business sales have been lower. They still expect to meet full year expectations.

However, they did get 15% of votes AGAINST the remuneration report. That included my votes as a holder as it looked a typical complex scheme with total pay too high in relation to the size of the business.

Another example of a poor pay scheme is that of IDOX (IDOX), an AIM listed company that operates mainly in the provision of software to local authorities. Reviewing the Annual Report, the Chairman acquired 585,000 share options last year (current price about 40p, exercise price 1p) based on a share matching scheme. The CEO acquired 3,512,400 share options under an LTIP with an exercise price of 0p (nil). The CFO also acquired 1,000,000 share options, again with an exercise price of 0p, but with a performance condition of the share price being greater than 45p. In summary I think this is way too generous so I have voted against the remuneration report. The AGM is on 28th May, so other shareholders have plenty of time to submit their votes.

Another item of annoying news I received recently was from Segro (SGRO) the property company. They will no longer be sending out dividend cheques from next year. I still prefer dividend cheques for my direct holdings because it is easy to check that the dividends are received and you know exactly when the money is in the bank because you pay them in yourself.

However looking at a report published by the Daily Telegraph last year, it quotes registrar Equiniti as saying that up to 30% of dividend cheques do not get presented which is a rather surprising statistic and must create a lot of extra work. Kingfisher, Marks & Spencer and Vodafone have already stopped dividend cheque issuance, forcing you to give the registrar your bank details. I may have to accept this as a reasonable change even if I don’t like it.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Fascinating Ocado Interim Results Presentation

I watched a fascinating on-line presentation from Ocado (OCDO) this morning. The financial results are difficult to interpret due to heavy investment in new CFCs (Customer Fulfillment Centres, i.e. warehouses), the exceptional costs of a fire in their CFC at Andover and the time lag on new CFCs becoming operational. Key points though are that retail revenue was up 9.7% and Solutions Revenue up 20.6%. The Solutions business is that part of the group that builds and operates CFCs for other people. But the statutory loss increased substantially and the adjusted group EBITDA fell 46%.

The interesting aspect is more their future business plans. As the CEO, Tim Steiner, said “2019 has seen a shift in the centre of gravity of Ocado Group. We have pivoted from being a pure play online grocer in the UK with a separate Solutions business to being a technology-led global software and robotics business providing a unique end-to-end solution for online grocery”.

They are also investing in Karakuri which provides robotic meal preparation, and Jones Food that operates automated vertical farms. They also covered the Ocado Zoom service which promises delivery within one hour, and averages 30 minutes. They suggest this will be profitable even with delivery charges of only £1.99 or £2.99 and will compete with food delivery services such as Deliveroo, most of which lose money.

Ocado clearly has ambitions to revolutionise the retail food market and they have the funds to do so it would seem with no need for more fund raising required in the short term. But valuing the business is not easy.

The share price is up 5.7% today at the time of writing.

The presentation can be viewed here: https://www.ocadogroup.com/investors/reports-and-presentations/2019.aspx

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Supermarket Winners and Losers – Ocado, M&S, Waitrose, Sainsburys and ASDA

As a recent purchaser of Ocado (OCDO) shares I have received the notice of a General Meeting to approve the deal with Marks & Spencer (MKS). The agreement is the formation of a new joint venture and will effectively replace the previous partnership with Waitrose (part of John Lewis) to provide own-brand products. This looks a very positive deal for Ocado if you read the detail as the Waitrose deal was restrictive in some regards and Waitrose has also been developing its own on-live supply operations. So far as M&S are concerned, it will enable them to provide on-line ordering and delivery via Ocado when shoppers who want M&S grocery products only appear to have a “click and collect” capability at present.

The new joint venture will be 50/50 owned by M&S and Ocado with Ocado receiving over £550 million in cash which will “give the group the option to develop and grow the business carried out by Ocado Solutions”, i.e. the technology they are selling to other supermarket operators. Although it is nominally a 50/50 joint venture, Ocado will have certain tie-breaking rights which means it effectively has control and should be able to continue to consolidate the accounts of the joint venture into those of the listed parent company. It would appear that Ocado see the real growth in their business profits as coming from selling technology solutions rather than baked beans or M&S cakes.

Altogether this looks like a very positive deal for Ocado so I shall vote in favour. It also looks positive for M&S as it will avoid them having to build a completely new IT and logistics system for on-line grocery orders, but Waitrose will lose volume.

A deal that collapsed last week was that of the merger of Sainsburys and ASDA. Killed off by the Competition and Markets Authority (CMA). This is what the CMA had to say about it: “It’s our responsibility to protect the millions of people who shop at Sainsbury’s and Asda every week. Following our in-depth investigation, we have found this deal would lead to increased prices, reduced quality and choice of products, or a poorer shopping experience for all of their UK shoppers. We have concluded that there is no effective way of addressing our concerns, other than to block the merger.”

That’s quite damning although Sainsburys’ CEO Mike Coupe complained the CMA was wrong about higher prices. The Sainsburys’ share price has been heading downhill since mid-2015 and the shares now look relatively cheap on some valuation measures although their return on capital looks quite dire. The collapse of the ASDA deal had relatively little impact probably because it has been looking difficult to get approval on it for some time.

All supermarkets have a challenging environment with too much floorspace now that shopping habits are changing and new growing competition from low cost operators such as Aldi and Lidl. It’s difficult to see where growth is coming from if mergers are off the agenda.

This area of retailing is changing rapidly and with a resurgent Tesco the operators in the middle ground are clearly being squeezed. Ocado seem to have a good view of where they are going while Sainsburys will no doubt be doing some hard thinking.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Audit Market Shake-Up, Ocado on TV, and Judges Scientific Presentation

The Competition and Markets Authority (CMA) have issued their final recommendations to improve competition in the audit market after an earlier public consultation. This follows widespread concerns over the dominance of the big four audit firms, the lack of apparent competition on price or quality, and repeated complaints about the quality of audits following several big and small company failures. Audit firms seem to have got off relatively lightly if the CMA’s recommendations are implemented by the Government. Here’s a brief summary of the proposed changes:

  1. Audit firms will have to operationally split their auditing operations from their consulting operations. This is not a requirement to totally split their businesses but to have separate management, accounts and remuneration.
  2. Mandatory joint audits are proposed for large companies where a big four firm is involved, with a few exceptions. This will enable smaller audit firms (“challengers” as they are referred to), to increase their capacity and credibility.
  3. Audit committees of companies will come under closer scrutiny with the audit regulator having powers to mandate standards, monitor those standards and issue public reprimands where appropriate. But the latter is surely going to be a somewhat ineffective remedy to incompetent audit committees. The CMA have rejected the idea of an independent body to select auditors as proposed by John Kingman due to legal barriers to that change, although they suggest it might be worth keeping under consideration.

One interesting statement in the CMA’s report is this: “In light of the consultation responses, we are recommending a combination of joint audits for most FTSE 350 companies and peer review for others”. That is important because previously it was suggested that only large companies be covered by either rule.

The key question is whether this will improve the quality of audits which is the major issue. I suspect not because more price competition might simply result in more bids at minimum cost with the result of cutting corners on the audit itself. Improved regulation is the key to improving audit quality. But improving competition by reducing the dominance of the big four is otherwise surely to be welcomed.

For more information on the CMAs report, go to https://www.gov.uk/cma-cases/statutory-audit-market-study#final-report . You can see what I said in my response to the original consultation here: https://www.roliscon.com/CMA-Audit-Market-Review-Response.pdf

There was an interesting glimpse into the operations of on-line supermarket operator Ocado (OCDO) on BBC television last night (programme entitled “Supermarket Secrets”). It showed their automated warehouse picking system although the final bagging up is still done manually – however that might change in future. Ocado is of course different to other on-line supermarket operations who mainly pick from in-store stock whereas Ocado have only central distribution operations with no physical retail outlets. Apparently most supermarkets have lower profits on their on-line sales as opposed to their in-store sales because the costs of delivery are not fully recovered in delivery charges. There are also more replacement items when delivery is from local supermarkets rather than from Ocado’s system.

There was an interesting review of Ocado’s business by Ian Smith in an FT supplement a month ago under the title “Pick of the Bunch”. It covered how Ocado moved from being a favourite of short-sellers to one of the best performing stocks in 2018. The change has been brought about because it is now perceived as more of a technology company than a simple retailer. That’s because it is selling its automated systems to other companies. That includes sales to Casino in France and Kroger in the USA.

Ocado lost money last year and is still forecast to lose money in the next two. But I bought a few shares regardless recently. It is interesting to see how the shopping habits in our family have changed. My wife does most of our food shopping and used to go to our local Sainsburys supermarket a couple of times per week. She started to occasionally use their on-line service when she was unwell. But now she uses it most of the time for her big weekly shop with only occasional visits to the store. If the habits of other families change in this way, one can see supermarkets adapting to the Ocado model.

A more long-standing holding of mine is Judges Scientific (JDG). This is a company that is an acquirer of small scientific instrument makers, and as with all good companies the management has a strong focus on return on capital. An interesting breakfast presentation after the results announcement can be seen here: https://www.piworld.co.uk/2019/03/26/judges-scientific-jdg-2018-full-year-results-presentation/ . It explains a lot about how the company operates.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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