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Last updated: April 14, 2014 8:19 pm
Sentiment has turned against Ocado, the best-performing large-cap stock over the past year.
The grocery delivery specialist hit a seven-month low on Monday, down 7.2 per cent to 349.7p. Caught in the technology sell-off, Ocado has dropped 43 per cent from its record high in late February.
According to Deutsche Bank, there are company-specific concerns too.
“We believe that the competitive landscape in UK grocery, and the outlook for Ocado’s licensing business, is genuinely looking tougher today than at the end of last year and see good reason why it should underperform any general tech sell-off,” said Deutsche.
A price war among the big four grocers might result in permanently lower industry margins as well as pushing down delivery charges, said Deutsche. A trickier UK market would have a knock-on effect for Ocado’s plans to license its systems overseas, it said.
“It will be challenging for Ocado to improve its retail profitability in this highly competitive UK grocery market, [so] international retail clients may begin to view any investment in online grocery as less compelling or urgent,” said the broker.
On bid hopes, Amazon would make most sense as a predator for Ocado, said Deutsche. But it reckoned that much of Ocado’s technology is replicable with enough time and resources, and that Amazon already has strong brand recognition, supplier relationships and scale.
A late rally turned the wider market positive as thin volume made for a volatile session.
Having earlier fallen as much as 0.8 per cent, the FTSE 100 closed up 22.06 points or 0.3 per cent at 6,583.76. The biggest gainers were consumer staples companies such as Reckitt Benckiser, which rose 2.1 per cent to £48.33 ahead of results on Wednesday.
African oil explorers rose after Glencore confirmed recent speculation by agreeing to buy Caracal Energy, the Chad oil explorer, for $1.35bn or 550p per share. The deal helped spur hopes of an M&A revival in the explorers and producers, among whom M&A activity fell 45 per cent last year.
Glencore’s offer “confirms this type of asset remains strategically prized and illustrates the potential vulnerability of ‘beaten up’ independent exploration and production companies with high quality assets”, UBS said. “The European E&P sector currently trades on a 22 per cent discount to net asset value and the return of M&A is helpful in this context.”
Caracal jumped 54.9 per cent to 530p while Tullow Oil was up 3.9 per cent to 859p and Afren gained 2.3 per cent to 139.3p. Separately, Liberum had Afren on a “buy” rating and a 228p target, with the broker arguing there was little in the price for its recent Ogo discovery off the coast of Nigeria.
Russian metals companies led the mid-cap gainers as worsening violence in Ukraine meant the rouble fell and commodities rose. Evraz, the steelmaker, climbed 5.5 per cent to 85.9p.
Haydale Graphene Industries struggled on its Aim market debut, ending at 192p against a flotation price of 210p. As the shares began trading the materials group’s house broker, Hume Capital, said it had suspended all market-making activities.
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