Ocado shares were falling on Tuesday after the premium online food retailer said that although revenue had marginally increased, higher costs caused a swing to an EBITDA loss.

Ocado’s 2022 revenue rose 0.6% to £2,513.8m but increasing costs saw EBITDA swing to a £74.1m loss. The cost of living crisis meant customer average basket value fell while active customer numbers grew 13% to 940,000.

“Ocado Retail has seen losses mushroom. Despite a 13% increase in active customers, volumes haven’t followed suit, meaning the cost to serve all those online orders has become a burden,” said Sophie Lund-Yates, Lead Equity Analyst at Hargreaves Lansdown

“Ocado is in the eye of the cost-of-living storm because its offering isn’t synonymous with being the best value, it’s a higher-end option, without the same benefits of enticing people in with tangible, physical goods like M&S or Waitrose can.”

“One quarter of British shoppers are struggling as grocery price inflation goes above 17% for the first time, according to new data from Kantar. It was a year ago that food inflation climbed above 4%, meaning consumers now feel like there’s a hole in their wallet every time they reach the checkout.”

Ocado’s retail business revenue was £2,203m in 2022, a 3.8% reduction from 2021’s £2,289m.

Ocado Costs

Growth in Ocado’s solutions business propped up revenue as their international solution business revenue 122% grew to £148m, but the revenue increase failed to add any meaningful impact to EBITDA. This accentuated the increase in administration and distribution costs that was responsible for the swing to a group EBITDA loss.

The group continue to win new Customer Fulfilment Centre (CFC) contracts and now has 23 sites live with a further 6 expected to come online in 2023.

Ocado signed two new Ocado Smart Platform contracts in 2022 to bring the total to 12 partners.

Despite the progress in the solution business, Ocado said they expect it will take 4-6 years for the group to become cashflow positive.

Ocado shares were trading down 9% to 567p at the time of writing on Tuesday.

The FTSE 100 enjoyed improving sentiment on Monday as the UK neared a deal with the EU over the Irish border and the pound avoided capping the FTSE’s gains with only a minor move against the dollar.

“The FTSE 100 made a strong start to the week as investors shrugged off the inflation and interest rate concerns which bedevilled markets last week,” said AJ Bell investment director Russ Mould.

“This went against the prevailing mood in Asia which followed in the footsteps of the US in seeing material declines after a key inflation reading closely watched by the US Federal Reserve came in ahead of expectations.”

While interest rates and the dynamics of overseas economies dictated trade last week, the focus was firmly back on the UK economy and relations with the EU on Monday.

The prospect of a greater cooperation with the EU helped lifted sentiment, but it was the move – or the lack of a move – in the pound that helped the FTSE 100 index rally.

Good news for the UK economy and a rising pound tends to curtail upside in the FTSE 100 and the absence of a strong sterling rally against the dollar provided support for London’s overseas earners.

“With no big fire lit under sterling and recent weakness persisting,  it has given support to the internationally focused FTSE 100, which benefits from a weaker pound given that it boosts earnings made overseas in dollars,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown.

Rolls Royce

Rolls Royce was the FTSE 100 top gainer as it continued the rally sparked by last week’s upbeat results. Rolls Royce is now up 52% in 2023 – no other FTSE 100 stock has performed better.

AB Foods was among the gainers after the Primark-owner said sales had increased 20% in their first half. AB Foods warned input cost inflation would mean operating profit are likely to be flat in 2023, although their outlook had slightly improved.

“Primark owner Associated British Foods painted a positive picture with its latest trading update. There’s good news on both demand and costs which has helped the company lift its guidance,” said Russ Mould.

“Resilient spending at Primark could well reflect the company’s budget credentials, people trading down from more expensive chains and brands. Particularly in areas like kids’ clothes where growth spurts mean clothes have a relatively short shelf life and therefore price rather than quality is a big driver of purchases.

Lloyds shares have more than recovered the minor losses incurred after they announced full year results last week and are shaping up for a run at the 52-week high of 53.97p.

Lloyds was the last FTSE 100 UK bank to report and wrapped an earnings season for the sector which was largely disappointing for those banks with a focus on the UK economy. 

However, when Lloyds is compared to to NatWest and Barclays, there are many positives to take away.

Lloyds share market reaction

First and foremost is the market reaction. Notwithstanding the variations in each respective companies’ metrics, Lloyds shares had the most favourable immediate market reaction to their results.

Both NatWest and Barclays suffered dearly in the aftermath of their full results with NatWest falling nearly 10%. In contrast, the Lloyds share price slipped only 2% and has since more than recovered their initial losses. While this has little bearing on the future performance of the Lloyds share price, it does highlight the market’s favourable perception of Lloyds shares based purely on 2022 results.

UK bank comparisons

UK banking results for 2022 on an underlying basis were very similar. Lloyds, Barclays and NatWest all reported higher net interest margins and an expansion to the top line.

What set the banks apart were impairments charges, one-off litigation costs, and 2023’s outlook.

Lloyds Net Interest Margin, a key profitability metric, was by no means the highest of the three UK-focused banking giants. However, Lloyds earns the entirety of their income from the UK through retail and business banking.

Barclays has previously enjoyed the benefits of a strong international and markets business, but in 2022 they suffered a litigation costs of £1,597m due to the over issuance of bonds. This hit their earnings and reduced their 2022 profit before tax compared to 2021.

Lloyds managed to marginally increase profit before tax to £6,928m, despite a £1,510m impairment charge. This would suggest Lloyds has largely priced in the impact of any up coming economic deterioration, and could even reverse the impairments next year.

NatWest recorded an impairment of just £337m and created the uncertainty of additional impairments next year.

2023 Outlook

In terms of the outlook for 2023, all three of the banks suggest Q4 2022 saw a peak in their net interest margins.

The impact of higher interest rates was evident in 2022 banking results. However, a stabilising inflation rate and the threat of an economic downturn means rates are unlikely to increase much further. Certainly not to the extent we saw in 2022.

This will cap banking net interest incomes and make the bank’s increasingly reliant on increased demand for banking products to generate earnings growth.

As the UK’s largest mortgage provider, Lloyds is well placed to benefit from an upside surprise in UK economic conditions. Lloyds does, however, lack the exposure to international financial markets and investment banking that Barclays does. This could mean Barclays outperforms Lloyds in 2023 if capital markets activities enjoy a revival.

Lloyds Dividend Comparison

Lloyds increased their ordinary dividend for the 2022 full year to 2.4p, an increase of 20%. As a result, Lloyds shares have a historical yield of 4.6%, largely in line with their peers.

However, Lloyds willingness to announce an additional £2bn share buyback sets them apart from peers and is likely a core reason for their recent outperformance.

It must be noted NatWest paid a rewarding 16.8p special dividend in August.

Lloyds Valuation

From a valuation perspective, Lloyds offers very little value compared to their peers. They trade at a premium to the average earnings and NAV multiples. This would imply Lloyds offers little value but also suggests the market feels Lloyds is a higher quality business and deserves a premium valuation.

Conclusion

Lloyds higher valuation reflects solid underlying earners and a willingness to front-load bad debts, at a time they are prepared to reward investors with higher distributions.

This makes Lloyds a more stable income option.

However, should we see upside surprises to the global economy and a recovery in capital markets, the Lloyds share price may lag their peers.

Tekcapital’s MicroSalt is gearing up for their proposed AIM IPO this year with a raft of new agreements for the low-sodium salt shakers.

MicroSalt’s salt technology has reduced overall sodium content in their salt shakers by 50% while still providing the same taste as normal table salt.

Millions of people suffer from cardiovascular disease and the disease has strong links with high sodium intake. Today’s announcement confirms MicroSalt have ensured their products can no help more people improve their diets through a number of new distribution agreements. 

MicroSalt has said their low sodium salt shakers are now available through UNFI and KeHE Foods. UNFI and KeHE are two of the U.S.’s largest retail food distributors and significantly increases the availability of MicroSalt products across the US and Canada.

“Excess sodium intake is one of the world’s greatest health concerns, and partnerships like these are the best way to make a difference in our efforts to address the sodium challenge. We are proud to have our shakers available at both UNFI and KeHe and truly believe that working together we can make a difference.” Said Rick Guiney, CEO of MicroSalt.

The announcement comes as markets prepare for highly anticipated news on MicroSalt’s AIM IPO. MicroSalt said they had appointed Zeus Capital as their AIM Nomad in December and expectations are they will push on with a listing in 2023.

Associated British Foods (LON:ABF) said sales for the first half rose 20% but warned operating profit would be flat over the full year as higher costs eat into margins.

Primark drove AB Foods higher revenue as sales jumped to £4.2bn, 19% above the same period a year prior at actual exchange rates. AB Foods said they expect Primark’s operating profit to be ahead of prior expectations for the full year as sales increase and costs rise less than expected.

However, rising commodity input prices for the sugar and groceries business are set to scupper any meaningful growth in their foods operating profit. Higher costs in their sugar business due to a poor UK beet crop are to blame for a predicted flat line in profits.

AB Foods shares were 1.4% at the time of writing.

“ABF expects group sales to jump up as consumer spending holds up better than anticipated. Primark’s had a big hand in underpinning the group’s increased sales performance, expecting to see double-digit growth as its customers find refuge from cost-of-living pressures in the value retail store,” said Aarin Chiekrie, equity analyst at Hargreaves Lansdown.

“Despite being well positioned to deal with consumers’ shrinking budgets, ABF is not without its challenges, the main one being significant cost inflation. The group’s trying to offset this through price increases, but this risks alienating the value-chain’s core customer base. This means that cost increases haven’t been fully passed onto customers so far, resulting in Primark’s margins falling from 11.7% to around 8%.”

In the six months to the end of December 2022 were good for the DX (Group) (LON:DX.).

The company, which is a market leader in the delivery of mail, parcels, pallets and freight of irregular dimension and weight, enjoyed strong trading, some 15% ahead of the previous year.

It reported that customer supply chain issues had normalised, labour market pressures had eased, and costs had been managed effectively.

Accordingly the group’s Management remains confident that the Group is well-positioned to meet its expectations for the financial year despite the economic headwinds, for the second half of the year. 

The Business

First established in 1975 as a Document Exchange service to the legal sector, DX now provides one of the widest ranges of overnight delivery services in the market, as well as courier and logistics services.

DX provides a wide range of specialist delivery services to both business and residential addresses across the UK and Ireland.

The group operates through two divisions, DX Freight and DX Express.

The company’s goal is to deliver exactly to its customers’ requirements, whether via a next day, scheduled or tracked, secure service, and provide assurance through proof of delivery.

Items that DX transports range from confidential documents and valuable packages to large, awkward-to-handle freight, unsuitable for automated conveyor.

The Interim Results

The six months to end December saw the group report a 15% lift in revenues to £231.3m (£202.0m), adjusted pre-tax profits were 96% ahead at £9.2m (£4.7m), earnings per share were 160% better at 1.3p (0.5p), while the group announced a 0.5p (nil) dividend.

CEO Paul Ibbetson stated that:

“The Group performed strongly, with both divisions contributing higher revenue and expanded margins. Trading was helped by the easing of customer supply chain and labour market pressures.

We are also pleased to return to the dividend list after six years. It reflects the success of our turnaround and growth plans, which commenced in 2018, as well as our confidence in the Group’s future prospects.

We are now in the second year of our £20-£25 million capital investment plan, which supports our growth ambitions and will help to drive further operational improvements and margin gains.

Trading to date in the second half, traditionally our stronger period, is in line with expectations, and we believe that despite economic headwinds, the Group is well-placed to meet its targets for the financial year.”

An ‘Ugly’ delivery?

A couple of weeks ago the company was featured in an article in The Sunday Times entitled ‘The driver, the logistics firm and the ‘espionage’ referring to certain of its employees attempting to gain certain trade information.

It received a claim from Tuffnell Parcels Express in relation to confidential competitor details being obtained by DX in the past. The group intends to defend its position robustly and will respond to the claim in due course.

Analyst Opinion – Target Prices in 50p to 57p range

Guy Hewett at the group’s NOMAD and Joint Broker finnCap, is very positive about its prospects, putting a 57p Target Price on the shares.

For the year to end June this year he is going for revenues to have increased to £465.1m (£428.2m), with adjusted pre-tax profits of £25.4m (£20.6m), earnings of 3.7p (2.8p) and looking to pay a 1.5p (nil) per share dividend.

For 2024 he sees £484.1m sales, £29.9m profits, 4.2p earnings and a 1.7p dividend.

Over at the other Joint Broker, Liberum Capital, their analyst Gerald Khoo rates the shares as a Buy with a 50p Target Price.

His estimates for 2023 are £473m sales, £26.7m profits, 3.4p earnings and a 1.5p dividend.

For the coming year he looks for £496m revenues, £32.5m pre-tax profits, with 3.8p earnings and a 1.7p dividend per share.

Conclusion – at least a 25% upside in 2023

The group has a growing pipeline of new business and is expanding its depot network, which in turn should drive productivity improvements and importantly build up its customer service.

As long as the Tufnells situation does not get too messy, I continue to consider that this group’s shares are significantly undervalued at the current 28p.

I would reckon that there is at least a 25% upside in 2023.