Ocado shares jumped on Tuesday after reporting first-half results, which were cheered by investors who have become increasingly pessimistic about the company after a number of setbacks in rolling out its technology business this year.

Ocado saw group revenue rise 12.6% to £1.5bn in the first half with all business units enjoying an uptick in sales. The group’s technology solutions experienced the largest increase in revenue on a percentage basis (21.8%) while Ocado Retail added the most in monetary terms.

After what has been a tough year for Ocado shareholders, there was a glimmer of hope for the future, with profitability and cash generation metrics improving.

“It’s been a tough year for Ocado shareholders, seeing the price get slashed by half as the firm contends with the grocery market’s stuttering post-pandemic recovery and high food inflation,” said Adam Vettese, analyst at investment platform eToro.

Ocado shares were 16% at the time of writing and touched the highest point since March, making Bernstein’s downgrade yesterday to ‘underperform’ with a price target of 250p look a little premature.

Ocado’s Adjusted EBITDA rose to £71.2m from £16.6m in the same period last year. This is a notable improvement in EBITDA, but it still requires a sharp uplift to quell any questions about the company’s valuation.

Looking forward, the company was upbeat about cash generation and said it expected the group to be cash flow positive in 2026FY. It also increased its EBITDA outlook for the year. 

Many focus on Ocado’s Retail business where there was improvement in sales. However, it’s the technology business that has afforded the stock a higher multiple than retailing peers, and investors will be quietly confident today’s numbers validate the investment thesis.

“Future growth relies on its so-called Technology Solutions business, where Ocado charges third-party retailers to use its robotic systems,” said Aarin Chiekrie, equity analyst, Hargreaves Lansdown

“Hundreds of thousands of orders are processed each week with the help of its automated bots scurrying around the trademarked grid system. While this side of the business saw cash profit guidance raised, overall group growth of late hasn’t been as fast as markets had hoped. Some retail partnerships have been paused or delayed this year, denting Ocado’s growth plans and leading to certain high-profile analyst houses downgrading the stock as a result.”

Adverse cost pressures, particularly in copper material price rises, which have hit the £10m capitalised Strip Tinning Holdings (LON: STG),will now materially impact revenue and profitability in the current financial year, with the company expecting FY24 and FY25 financial performance to be behind market expectations.

This morning the group has guided that it now expects that for FY 2024, revenues will be approximately £9.1m and that the adjusted EBITDA loss will be £1.9m.

The Business

Supplied in high volumes, Strip Tinning products are used by most major vehicle OEMs, with a bias towards the premium end of the market and EVs, as these vehicle types typically have more sophisticated electronic features.

Typical applications are sports and luxury cars, trucks, off-highway vehicles, new vehicle types such as autonomous shuttles, motorcycles, and even Electric Vertical Take Off and Landing (eVTOL) aircraft.

Strip Tinning has four major product groups, all serving the automotive electrical connector market – its Glazing segment is made up of Busbar and Connectors, whilst the Battery Technologies segment contains Flexible Printed Circuits (FPC) and Cell Contacting Systems (CCS).

Busbar – ultra fine gauge plated metals such as tinned copper strip to provide a circuit for electrical connections in a vehicle and Tungsten wire used for heating elements.

Connector types include cable connectors, flat foil connectors, and, increasingly, FPC connectors. These connectors provide a broad range of functionality from heated windscreens to antenna GPS / FM / TV digital signal reception and internet access, emergency response, camera and Radar / Lidar systems and “smart glass” applications for tinting, solar power generating glass, and embedded LED lighting.

FPC are circuits printed onto a flexible substrate, allowing the circuit to tolerate flexing during use as well as being thinner, lighter and simpler to install. The use of this technology is well established across all forms of electrical equipment, including in the automotive sector.

CCS, large, sophisticated electrical connectors for batteries. The CCS electrically connects the cells and provide monitoring of the cells for charge (efficiency) and temperature (safety).

The CCS can be used with battery packs for a great range of applications, including truck, off-highway, and static power applications

Currently, 90% of Strip Tinning product is exported (with the majority of the balance destined for export) to over 30 countries, including China, South Korea, Japan, Mexico, and Morocco.

Management Comments

In the April issued Report & Accounts, CEO Richard Barton had previously stated that:

“We believe that 2024 will be a formative year for the business with a strong focus on preparing for profitable delivery of the nominations already received as they ramp up in in 2025 and maintaining the investment needed to maximise our success in converting the strong Battery Technologies and Glazing sales pipeline we have before us to secure the nominations that will return us to significant growth from 2025.”

This morning Executive Chairman Adam Robson stated that:

“The two Glazing and one major Battery Technologies nominations in the first half of the year have secured our medium-term growth plans through to 2026, by which time we expect to have doubled the sales of the Company. 

In the short-term, the sector-wide headwinds we are currently facing are clearly frustrating.

That said, our nominations, extensive industry experience, ever improving productivity and strong customer relationships give us confidence in improved margins and further growth as customer confidence returns and as further new nominations are secured.”

Analyst View

Caroline de La Soujeole at Singer Capital Markets still rates the group’s shares as a Buy, but with a lower Price Objective of 65p (75p) a share.

The analyst considers that:

“For the patient investor, willing to look through short-term volatility in performance, there is a strong rationale for owning the shares given expectations of a much-improved trading performance from FY26 onwards with delivery of the Glazing & Battery Technologies order book supporting significant potential shareholder value creation.”

This morning the group’s shares have responded to the adverse news, by easing 25% to 38.50p.

The FTSE 100 was marginally lower on Monday despite the attempted assassination of Donald Trump threatening volatility in equities markets as trade got under way.

London’s leading index did fall materially in the early minutes of trade but made a respectable recovery as the session progressed and was down just 0.2% at the time of writing.

“Markets were surprisingly calm given the assassination attempt on US presidential candidate Donald Trump,” says Dan Coatsworth, investment analyst at AJ Bell.

“While equities saw a small pullback in parts of the world, there was no panic on the markets as a result of the weekend of violence.”

The biggest drag on the index stemmed from weak Chinese data released overnight that hit mining stocks heavily. Chinese GDP grew just 4.7% in the second quarter, missing analysts estimates of 5.1% and slower than growth of 5.3% in the first quarter.

“Investors are having to become accustomed to China running in second gear, a far cry from a decade ago when GDP growth was in the 7% region and when it was the envy of the world,” Coatsworth said.

“While 4.7% GDP growth is still better than many parts of the world, and certainly streets ahead of what the UK is currently managing, it is seen as failure in the context of China’s bold ambitions to be a superpower,

“Weaker economic activity has negative connotations for commodities demand, which in turn creates a less attractive backdrop for miners producing metals and minerals. That explains why Antofagasta and Anglo American were among the biggest fallers on the FTSE 100 on Monday.”

Antofagasta was down 3% and Anglo American dipped 1.7%.

Although the mining sector was the biggest drag on the index in terms of number of points, the impact of China’s luxury sector on Burberry’s sales meant the brand was by far the FTSE 100’s top faller on Monday.

Burberry shares were down over 16% at the time of writing after announcing retail revenue sank 21% in its first quarter, leading to a forecast of a first-half loss.

The Asian Pacific region, which includes China, saw retail sales plummet 23%, with Mainland Chinese sales dropping 21%. Japan was the only bright spot with sales gains of 6%.

“All of this led Burberry to suspend dividend payments, which is a desperate measure to preserve cash and fortify the balance sheet, indicating that fortunes aren’t expected to pick up in the near term,” said Aarin Chiekrie, equity analyst, Hargreaves Lansdown.

“Brand weakness extends beyond China, with Europe and the Americas also seeing double-digit revenue declines. There’s a lot of work to be done to make up for years of underinvestment in the brand. Unsurprisingly, the shares have taken a big hit in early trading. The new boss has a lot of work to do to steady the ship and prove to investors that calmer seas lie ahead.”

The dismal outlook for Burberry was compounded by another change in senior management as the CEO stepped down with immediate effect.

British luxury fashion house Burberry shares sank on Monday after reporting a significant decline in retail revenue for the first quarter of fiscal year 2025, amidst a challenging global luxury market and internal leadership changes.

Burberry shares were down 10% at the time of writing.

The company’s retail revenue for the 13 weeks ended 29 June 2024 fell by 22% to £458 million, compared to £589 million in the same period last year. Comparable store sales declined by 21%, a stark contrast to the 18% growth seen in the previous year.

The poor performance has led to changes at the top – a familiar story for Burberry as the group grapples with its brand image and target market.

Burberry announced the immediate departure of Chief Executive Officer Jonathan Akeroyd, who will be replaced by Joshua Schulman as the new CEO and Executive Director.

“Burberry announced a change at the top by appointing Joshua Shulman as Chief Executive Officer, who has experience at Kors, Coach and Jimmy Choo. Former boss Jonathan Akeroyd has stepped down with immediate effect,” said Aarin Chiekrie, equity analyst, Hargreaves Lansdown.

“The change comes alongside a first-quarter trading update which makes tough reading for investors. Weaknesses that were already highlighted by the group coming into the financial year have worsened, with first-quarter revenue falling by an eye-watering 20%, ignoring the impact of exchange rates.”

The luxury brand faced headwinds across all key regions, with Asia Pacific experiencing a 23% drop in comparable store sales, the Americas declining by 23%, and EMEIA (Europe, Middle East, India, and Africa) falling by 16%. Only Japan showed positive growth at 6%.

Burberry has struggled with sales since the pandemic. Initially, the travel restrictions associated with COVID-19 and travel spending gave Burberry some breathing room. However, it is now clear there are deep-rooted problems at Burberry and investors acted with their feet and jumped out of the stock on Monday.

Burberry warned that if current trading trends continue, it expects to report an operating loss for the first half of FY25 and full-year operating profit below current consensus. As a precautionary measure, the company has decided to suspend dividend payments for FY25 to maintain a strong balance sheet and invest in long-term growth.

For the full fiscal year 2025, Burberry anticipates wholesale revenue to decline by around 30%, with capital expenditure projected at approximately £150 million. The company also expects a currency headwind of about £55 million to revenue and £20 million to operating profit.