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UK parcels delivery company DX Group has seen its shares slump by almost two-thirds on Friday after it issued a profit warning, and the reasons for the warning could have implications for bigger rivals Royal Mail and UK Mail.
DX provides next-day delivery for mail, parcels and even heavier items across the UK and Ireland. The company, which is listed on London’s junior AIM market, is a lot smaller than Royal Mail and UK Mail, but what it says about the market does have implications for its rivals.
It says its revenue for the four months to end-October are down 5.3% from a year earlier, and it therefore expects profits will be “significantly below current market forecasts”.
Part of that is company-specific: DX says that while the new business pipeline in its parcels unit is healthy, it is converting into actual revenue more slowly than it had hoped. Its DX Exchange business, which handles business-to-business mail and document handling, is also experiencing a faster erosion of volumes than it expected.
However, there are two other aspects of the profit warning that are market wide. Firstly, it says prices are still under pressure. Secondly, it says it’s having trouble getting enough drivers, and that’s pushing up costs. It says this is an industry-wide issue.
These two issues could also be affecting Royal Mail and UK Mail. UK Mail will report its interim results on Wednesday, followed by Royal Mail on Thursday.
DX Group shares have plunged by two-thirds on the profit warning
UK Mail did give a trading update in early October that made no specific mention of either parcel market pricing pressure or driver shortages. It said revenue was up 4% on the year in the six months to end-September, while average daily volumes in its parcels business were up about 8%.
It has recently transferred to a new fully-automated hub, which is allowing it to grow after a slowdown, particularly for the parcels business, during the move.
Meanwhile, analysts are expecting Royal Mail to report a drop in first-half revenue to £4.41 billion, from £4.53 billion a year earlier, and a drop in earnings before interest, tax, depreciation and amortisation to £393.0 million, from £416.0 million, according to consensus data compiled by Thomson Reuters.
Royal Mail has constantly warned that the UK parcel market remains highly competitive and trading is tough.
Shares in DX, meanwhile, are down 66.8% at 28.19 pence on Friday, a new low for the stock since it listed on AIM in February 2014 at 100 pence.
It warns that it will cut the dividend for the current year to 2.5 pence, from 6.0 pence last year.
“This announcement is very disappointing. However we continue to position the business for long-term success, creating a more efficient operating structure to support our services under our OneDX programme,” says DX Chief Executive Petar Cvetkovic.
“The company has signed a number of major new customer accounts in the period to date, including accounts which have yet to start trading, and management remains focused on opportunities for long term relationships providing commercially acceptable returns,” the company adds.