UK Mail still not sorted

UK Mail's margin woes are now set to drag into 2017

November 18, 2015

Three months down the road from August's profit warning - which cut expectations for the current year to March 2016 - UK Mail (UKM) took advantage of its interim results to lower expectations for the 2016-17 financial year. The shares fell 10 per cent on the news and are now down 36 per cent over the past six months.

IC TIP: Hold at 303p

The postal group's half-year figures reflect ongoing problems with its transport network and a new sorting hub in the West Midlands, which proved incapable of handling oddly sized mail items. The consequent reversion to a secondary manual-sorting hub constricted an otherwise encouraging increase in volumes and put the squeeze on margins. Although group turnover headed in the right direction, adjusted operating profits for the six months to September more than halved to £5.2m.

Management felt compelled to pare back the half-year dividend, but beyond the financials there were some encouraging signs. Improved customer retention and new contract wins combined to bump up volumes in the mail business by 8 per cent, even as the wider market continued to decline. Meanwhile, average daily volumes in the parcels business were up 9 per cent, with volume growth in both the business-to-business (B2B) and business-to-consumer (B2C) segments. But management noted an ongoing volume mix shift towards the lower-margin B2C segment.

Investec expects adjusted pre-tax profits of £10.5m for the full year to March 2016, giving EPS of 15.2p (FY 2015: £21m and 28.9p).