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Ocado will win more overseas business with 'compelling' offer - Credit Suisse
Ocado's target price was yanked higher by Credit Suisse on Monday as the online grocery specialist was seen winning further overseas deals based on its new "compelling" contract structure.
Credit Suisse, which reiterated its 'outperform' rating on the stock, upped its share price target to 600p from 480p as it now expects "at least two" more third-party deals to be announced over the next 12 months.
Ocado earlier this month signed up its second major international customer less than two months after the first, with Canada's Sobey, with upfront fees upon signing and during the development phase, with ongoing payments linked to capacity and service criteria.
The Swiss bank noted that the Canadian deal uses the same contract structure as the contract with France's Casino signed at the end of November, with exclusivity for as long as a pre-determined capacity growth profile is met.
"We see this as compelling for both parties; partners can leverage the exclusivity while Ocado gets visibility without having to juggle multiple, potentially conflicting installations in any one country. It also provides a strong incentive for potential partners to fast-track the evaluation process given the risk that a competitor may shut them out by signing first," analysts at the bank wrote.
With share prices of both Casino and Sobeys climbing since their deals with Ocado, this is seen as providing "comfort" for the management teams and boards of potential partners.
The analysts also said they "don't agree with those who view Ocado as expensive" as the FTSE 250 company's shares trade at very high near-term multiples but this is "consistent with its growth profile and back-end weighted cash flows".
Accordingly, to value the company and calculate the target price, a discounted cashflow model was used, with each large-scale facility valued at 53p per share and the bank's 'base case' assuming four facilities and the UK business valued separately at 390p.