Join our community of smart investors

Connect fighting multiple battles

The distribution business warned that full-year profit would fall short on analyst expectations and that the cost savings programme is behind schedule
January 25, 2018

It’s been a tough start to the calendar year for Connect (CNCT). Shares in the distribution company fell by a third after it warned that full-year adjusted profit would come in somewhere between £42m and £45m, falling short of analysts’ expectations of around £49m, while group revenue was down 3.5 per cent to £564.5m during the 13 weeks to 13 January. This should not have come as such a surprise – in October chief executive Mark Cashmore said 2017 had been a “challenging year” for the group, but emphasised cost savings were set to come through.

IC TIP: Sell at 75p

Selling magazines and newspapers proved to be particularly challenging. News distribution and media revenue fell 4.1 per cent to £500.4m, in line with management expectations. Its optimistic that the June Fifa World Cup will drive demand for magazines and stickers, boosting second-half margins.

The 'Pass My Parcel' delivery service saw volumes more than treble during the year-to-date, with revenue up 222 per cent on the same time last year to £2.5m. But delays to the roll out of new contracts and a business-to-business service, along with more activity in the less profitable return services, have hurt margins. Mixed freight sales may have improved marginally to £63.9m, but the cost-cutting programme has been put on hold in an effort to protect service levels in what management called a “highly competitive market”.

Another disappointment came from the book business. Connect had agreed to sell it to German investor Aurelius Equity Opportunities, but the latter has now backtracked on the deal as it “can no longer complete on the current terms”. Connect has written to Aurelius, arguing that it is legally obliged to complete the transaction on or before 31 January 2018 and reserved its right to pursue legal redress. The trading update pushed Numis analysts to cut their expectations for full-year pre-tax profit to £40.4m, from £48.3m.