UK Mail's (UKM) ability to capitalise on strong growth in the business-to-consumer (B2C) segment is driving a share price that has more than doubled in a year. The £280 million logistics specialist rose 8.7% to 560p after the group's interim management statement revealed first quarter trading would be 'well ahead' of previous expectations.
The group's parcels business continued to deliver a strong performance, with daily volumes for the quarter increasing by some 25% compared to the same period last year while mail business revenues were down slightly, largely due to mix changes. While this segment accounts for over half of the company's overall revenue, the business-to-consumer side of UK Mail continues to give a robust performance.
While the mail division looms larger in turnover, it is the parcels division that accounts for the biggest bottom line contribution. The UK parcels market's growth is being driven by B2C as more than 14% of retail sales now occur online. This is forecast to reach 28% by 2018.
In terms of breakdown, UK Mail's parcels focus has been weighted towards the business-to-business (B2B) end of the market. Its attention is increasingly being drawn to the B2C segment, especially the high end (e.g. mobile handsets and laptops, where security is a high priority). Margins in the parcels segment suffered a dip since 2008/09 when they stood at around 9.5%, a low point of around 6.5% was reached in 2011/12 before bouncing back in 2012/13 to around 8.5%.
In May, when the group's results for the year to 31 March were released, UK Mail unveiled plans for the installation of further automated sorting equipment, at a capital cost of approximately £20 million to be incurred over the next two financial years.
This enhanced automation spend will, according to Andy Jones an analyst at RBC Capital Markets, 'help UK Mail maintain its cost leadership in the market. The challenge for the industry is to adapt delivery networks geared towards B2B, to B2C. The requirements for each are slightly different – and come with different problems, such as redelivery costs and lower unit prices (for B2C).' As a consequence, the broker is lifting its operating profit forecasts by 3% 13/14E and 5% 14/15E reflecting a lower tax rate and the higher base level of profits in 2012/13.