UK Mail shares have hit a near two-year low on Wednesday, after the company issued another profit warning because it’s struggling to manage the transition to its new sorting and delivery hub and cut its dividend.
It comes after its rival DX Group issued a profit warning last week. However, the UK Mail issues are company specific, and if anything, larger rival Royal Mail could be set to benefit from its loss of business in the highly-competitive UK parcels market.
UK Mail shares have fallen by almost a third in 2015
Source: Thomson Reuters
UK Mail has been growing fast and the move from its former headquarters in Birmingham to a fully-automated new hub in Coventry is supposed to allow it to continue handling more of the UK’s letters and parcels volume.
The first signs of problems came in August when UK Mail admitted that while parcels volumes were up on the year, it had lost some business and customers during the transition. More embarrassingly, it also had to admit that more of the parcels it handles than expected couldn’t be sorted by its new automated equipment, and it was going to have to spend more to resolve the issue.
UK Mail now says the issues are taking longer to resolve than it had hoped, and that’s going to weigh on its results in the financial year that begins on April 1. In its own words its expectations for that year have “softened slightly”.
It has therefore cut its interim dividend for the current financial year to 5.5 pence a share, from 7.3 pence a year ago.
That caused its shares to drop 10.7% to 325.00 pence on Wednesday morning.
UK Mail says on Wednesday that its automated sorting equipment is “working well” and will deliver the expected benefits over the “medium term”. However, it is also “facing a number of challenges as a result of a combination of inefficiencies in the new hub and in our transport network”.
“This, combined with the volumes of non-machinable and incompatible freight that cannot be handled by our automated sortation equipment, has placed added pressures on the new facility. As a result we have experienced additional costs, a temporary reduction in service levels (now restored) and a greater level of customer churn than anticipated, impacting our parcels revenue mix,” it says.
The company says service levels are already back where they should be, and a “detailed plan” is under way to address the other issues so that it can get its parcels business back to its targeted level of profitability.
It also says it will be working hard on winning customers and managing the increased volumes during this crucial pre-Christmas trading period. It says has an “absolute focus on profitability and maintaining high service levels”.
The impact was evident in the company’s results for the six months to September 30, the first half of the current financial year. Revenue in its parcels business was up 5.3% at £124.0 million, but operating profit slumped 37.6% to £7.9 million. The unit’s operating profit margin fell to 6.3% from 10.7% due to the extra costs of resolving its issues.
UK Mail revenue is up, but its profit margins have been hit