DCF Ocado Group

Looked at them a while back, not in front of laptop but happy to give my 0.02 off memory...

TLDR: Had to extend DCF by more than 10 years given the long lived natured of CFCs as well as some of the anticipated roll outs in certain regions (e.g. their partnership with Aeon). Despite this couldn't bridge to stock market valuation with only announced/anticipated CFCs (might have changed given how the stock has performed), last we looked at it market was pricing in many more partnerships for new CFC roll-outs. 

In terms of methodology would take a SoTP approach, basically can think of company as having 2 parts: a.) the M&S JV which in essence is an online grocer and b.) the solutions platform that provides the CFC technology to the likes of Kroger, Casino etc. Company also provides pretty granular divisional splits down to EBIT if not mistaken which helps given you likely would ascribe different valuations for the 2 different businesses / if you have a value in mind for the M&S JV understand what the market is ascribing to the solutions platform business. .

For the online grocery business, this is a relatively straightforward task as they have many operating KPIs (e.g. basket size, # of customers, # of orders etc.), so modelling here should be relatively straightforward. Would model average price per item as plus/minus food KPI and average basket size likely decreasing given consumers trading down to discounters (Aldi, Lidl), though arguably second effect more muted given M&S' target segment of already affluent/premium customer base. Would also be relatively thoughtful about the total picking capacity (i.e. total volume sales cannot exceed total picking capacity) this is relevant given some of the existing CFCs in the UK are of an older generation and is more limited in capacity. Would also squeeze gross margin on a % basis in line with the industry peers (e.g. Asda, Morrisons) given the difficulty in passing through cost inflation fully on a % basis. 

For the solutions platform business, this is really the crux of Ocado and why it trades the way it trades. It effectively (when scaled) is a one-stop-shop SaaS-like offering that allows legacy grocers to be profitable (thus far very few if any legacy grocers have been able to operate online profitably at scale). Off the top of my head, Ocado splits part of the upfront fee with the grocer, and then charges an ongoing %fee for total capacity (read: this is not total sales achieved but rather total capacity thus Ocado assumes no volume risk other than for the M&S JV), believe pricing also scales with inflation with (relatively) minimal maintenance capex. This is also hence why this part of the business once scaled can be very lucrative (if you believe the underlying technology is superior). Note that these CFC unit economics related info is not widely covered in the annual reports and instead will have to be fished out from the equity research reports (have read many good coverage/initiation reports) that gives a breakdown on unit economics as well as total pipeline of CFCs by geography. Once you have this info, would have individual CF build-ups for the different CFCs and would have them flow into the main I/S, C/F. I have also seen some ER reports taking a lazy approach of ascribing a CFC-level NPV and using that to backsolve what the market is pricing in terms of CFC roll-outs.    

Some other considerations - I remembered centralized/SG&A costs being massive. In SOTP analysis, would personally book this separate to the online grocery and solutions business (i.e. as a negative NPV), this way it helps you to contextualise what the values are for online grocery and solutions. Also worthwhile seeing if Ocado capitalizes any SG&A, can't remember off the top of my head. This is typically quite common for cashburning tech companies, and is a way to juice up EBITDAs when in essence it's an operating expense. Lastly, for the solutions business given the company already has agreements in some of the largest markets (e.g. Kroger in US, Aeon in Japan, and Casino JV in France), I would use a TAM approach to understand how many more CFC roll-outs would be realistic for new geographies, as my understanding is Ocado can't have partnerships with other grocers in geographies where they already have an existing partner other than in France - where the agreement is a JV with Casino and the French entity can continue selling the solution to new grocers with profits split equally to the French entity (do DD this entirely off my memory).