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UK Mail hit by transition pains

The postal service's transition phase presents near-term challenges, but the long-term outlook looks good
May 20, 2015

UK Mail (UKM) has reacted to competitive postal markets by outlining plans to improve service, efficiency and innovation. Key to this transition is the ongoing process of moving into a new automated hub in Coventry. This should provide extra capacity and reduce operating costs, but it also prompted boss Guy Buswell to warn - somewhat ominously - that this year's results will be more weighted towards the second half.

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Spending £36m on the new facility took the balance sheet from a net cash position of £27m to a £5.2m deficit. But Mr Buswell sees huge potential in these investments, claiming that the £20m spent on the automation machine could yield double-digit returns.

UK Mail was also hit by capacity constraints last year, as the collapse of City Link at the end of December resulted in significantly higher volumes for its core parcels business. That and growth in lower-margin business-to-consumer work hit divisional profits, which fell 5 per cent to £21m. Profits in the group's mail division fell, too, although strong customer retention and new customer wins did drive volumes up 4.3 per cent. That's impressive against a 3 per cent volume decline in the broader domestic mail market.

In light of the rising costs stemming from UK Mail's move to Coventry, Investec slashed its adjusted pre-tax profit forecast by 7 per cent to £20m, giving adjusted EPS of 28.9p (from £21m and 28.9p in 2014-15).

UK MAIL (UKM)
ORD PRICE:516pMARKET VALUE:£283m
TOUCH:490-510p12-MONTH HIGH:636pLOW: 380p
DIVIDEND YIELD:4.2%PE RATIO:18
NET ASSET VALUE:121p*NET DEBT:8%

Year to 31 MarTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201139616.121.218.2
201242912.917.518.2
201347517.824.718.8
201448121.930.721.3
201548520.129.021.8
% change+1-8-6+2

Ex-div: 30 Jul

Payment: 28 Aug

*Includes intangible assets of £13.2m, or 24p a share