Solving a logistical underperformance

The new management team at Braintree-based Xpediator (XPD: 28.5p) have work to do to achieve house broker Zeus Capital’s flat full-year underlying pre-tax profit estimate of £9mn after the international freight management services group posted a double-digit profit reversal (from £3.6mn to £3.1m) in the first half on 49 per cent higher revenue of £189mn.

The result excludes a raft of one-off items, which sent first half reported pre-tax profits plunging 90 per cent to £0.23mn after accounting for £0.3mn of restructuring costs, a £1.5mn non-cash impairment charge on one of its businesses, Delamonde Anglia, a £0.7mn non-cash amortisation charge relating to acquisitions, and an additional £0.3mn accounting charge for interest, a quirk of IFRS16 accounting.

Admittedly, the group has a seasonal second half weighting, and there are strong tailwinds from central and eastern European (CEE) freight forwarding, most notably Lithuania and Bulgaria, and the fast-growing pallet freight network Pall-Ex Romania. Indeed, freight forward operating profit surged from £4.1mn to £5.9mn on 54 per cent higher revenue of £155mn in the first half, principally due to CEE activities.

It was just as well. That’s because Xpediator’s logistics and warehousing businesses moved from a £1.8mn operating profit to a £0.4mn loss in the six-month period despite the record performance from Pall-Ex in Romania, the result being impacted by underperforming UK logistics activities. Both the group’s Braintree and Beckton warehouses remain lossmaking, albeit a review of customer pricing at Braintree will improve the second-half result. Xpediator has also been working closely with its largest retail client at Beckton to launch a new direct-to-consumer offer, and reports a healthy sales pipeline of potential new warehouse customers. The new Southampton warehouse is now fully operational and is at capacity, so it should contribute strongly to the second half.

However, Xpediator is facing issues in UK freight forwarding, too, hence the impairment charge taken at Delamonde Anglia. That unit has consistently failed to achieve the profit margins of Xpediator’s operations on the continent, so the managing director of one of the Baltics businesses has recently been brought in to sort things out.

Finance director Richard Myson returned to the group in June and needs to improve Xpediator’s working capital management, too. Net debt has risen sharply, mainly due to increased early payments made to suppliers to secure services, but also due to delays in collecting invoices in the UK following a change in operational systems. Analysts at Zeus still expect net debt to exceed £7mn by the year-end, a consequence of which is higher finance charges. The tighter cash situation has seen the 0.5p-a-share interim divided axed and the final dividend is likely to go the same way.

The changing boardroom in the past six months – Xpediator has a new interim chief executive as well as a new non-executive chairman – has not helped investor confidence either, another reason why the share price has underperformed since I advised taking a cautious stance (‘Seeking value opportunities’, IC, 4 April 2022). So, although the shares only trade on a current year price/earnings (PE) ratio of 10, the absence of a dividend, potential risk to earnings from deteriorating macroeconomic conditions, and the need to reduce debt means the share price could come under further pressure. Sell.

Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards

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