Ocado, Kape and Kainos drive the UK’s digital transformation

Online grocer Ocado is an illustration of what UK companies can do when it comes to leveraging artificial intelligence and robotics for operational efficiencies. With the right investment, digital transformation efforts could boost the UK economy by hundreds of billions of pounds by 2030, potentially benefiting Kainos and Kape.

- Ocado was one of a handful of UK-listed companies to have been supported by the now-defunct Tech Nation.

- An AWS report noted that digital transformation could boost the UK economy by £413bn by 2030.

- Kape is held by the ETFMG Prime Cyber Security ETF, which is up 7% year-to-date.

The UK’s tech industry is facing a challenging environment, but Ocado [OCDO.L], Kape [KAPE.L] and Kainos [KNOS.L] are showing promise and should prove to be long-term digital transformation plays.

In the near-term, there are concerns that UK companies could fall behind when it comes to the digital transformation.

With the nation as a whole already hampered by a shortage of tech skills, the government recently pulled the funding behind Tech Nation, an incubator set up explicitly to boost investment in the UK and to attract and retain talent. Its forced collapse came just days after chancellor Jeremy Hunt voiced his vision of turning the UK into the next Silicon Valley.

Tech Nation’s alumni include Darktrace [DARK.L], Deliveroo [ROO.L], JustEat [JET.L] and Ocado.

The Ocado share price is up 2.2% year-to-date; Kape’s is up 6.9%, while Kainos’ is down 5.1%.

Digital transformation developments

Shares in Kape jumped sharply earlier this month following reports that the privacy software provider had received a £1.25bn takeover bid from its majority shareholder, the Israeli billionaire Teddy Sagi, through his investment firm Unikmind Holdings.

While there’s been no news of note from Kainos recently, the stock did receive a major upgrade from Berenberg in November, from ‘hold’ to ‘buy’. The bank described its earnings for the six months to the end of September as “strong”, according to a note seen by ShareCast. 

“With management commenting that many customers are ‘accelerating’ their digital investment agendas, it appears there will be no slowdown in the near term”, wrote the Berenberg analysts. Kainos is a digital transformation partner for both the private and public sectors.

Unlike Kainos’, Ocado’s profits were squeezed last year. The online grocer pressed pause on two new automated distribution centres in December as inflation and the cost of living crisis ate into online grocery demand. Nevertheless, the company’s next generation of automated distribution centres are delivering improved operating costs and customer experience and fulfilment.

Ocado’s technology is coveted by others in the retail industry. Kroger [KR] and Lotte Shopping [023530.KS] are just two of the players that have partnerships with the company.

Investment key to driving digital transformation

Ocado’s use of technology is helping to position the company as a future UK leader in artificial intelligence and robotics.

Companies like Ocado, Kape and Kainos that are using technology to drive digital initiatives could substantially boost the UK economy. Digital transformation could add £413bn to the UK economy by 2030, according to a study conducted by consultancy Public First for Amazon’s [AMZN] cloud business Amazon Web Services (AWS).

The report published in October warned that, in order to realise the economic benefits, the UK needs to invest to support the development of digital tools. This will help to create a bigger and more diverse talent pool.

“Despite the benefits digital tools provide for organisations, digital transformation is not guaranteed. Achieving these digital ambitions requires investment in the right areas,” wrote AWS in the report.

Consultancies like Kainos will have a role to play in helping companies implement their digital transformation strategies, while software providers like Kape could well be the vendors of choice.

Funds in focus: ETFMG Prime Cyber Security ETF

Being the bigger name of the three companies, Ocado is held by more globally notable funds. The stock accounts for 0.33% of the First Trust Nasdaq Artificial Intelligence and Robotics ETF [ROBT] as of 17 February. The fund is up 16.5% year-to-date.

Ocado and Kainos are held by the Vanguard Active UK Equity [0P0001IL91.L], which is aimed at long-term investors. They have been allocated 0.87% and 1.61% of the portfolio respectively. The fund is up 8.9% year-to-date.

The iShares MSCI UK Small Cap UCITS ETF [CUKS.L] holds both Kainos and Kape, with weightings of 0.37% and 0.16% respectively. The fund is up 7.7% year-to-date.

Kape, the only alternative investment stock of the three, is held by the ETFMG Prime Cyber Security ETF [HACK], with a marginal weighting of 0.21%. The fund is up 7% year-to-date.

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