Logistics company Connect (CNCT) is down 29.4% to 74.6p as it unleashes a big profit warning.
The company now expects pre-tax profit to be in the range of £42m to £45m versus market expectations of £49m for its 31 August year-end.
While management anticipated the decline in newspaper and magazine sales, this has not been offset by growth in its Mixed Freight and Pass My Parcel divisions.
Pass My Parcel volumes are up 347% year to date at 1.3m units but the primary driver of this growth has been in low margin customer returns, especially during the Christmas period.
The division is also beset by delays to previously announced retail contracts due to IT issues. The result of this is that the company expects 2018 full year losses for the division to be in line with those of 2017 at £6.3m.
Connect’s Mixed Freight business has grown 1.3% in the first 19 weeks of its 2018 year but management has noted that the market remains challenging. Cost reductions in the business to preserve ‘current service levels’ are ‘slower than anticipated’.
The company has appointed Stuart Godman as commercial director and introduced a new range of controls to manage costs. Management hopes these measures will improve profitability for the second half of the year.
BOOK DIVISION SALE DELAYED
One highlight of Monday’s statement is the comment ‘current dividend expectations [are] underpinned by a continued good cash performance’.
Unfortunately, the sale of the company’s book division to Aurelius Equity for £11.6m has now been put in doubt. Connect received a letter from Aurelius on Sunday 21 February stating it ‘can no longer complete on the current terms, as we can see no way of financing this transaction’.
Connect has not taken this lightly, releasing a statement saying it has ‘reserved the right to pursue legal redress against Aurelius in light of this development’.
One of the main appeals of this stock to investors is its generous prospective dividend. According to forecasts by investment bank Berenberg, the dividend yield for 2018 is a whopping 13.5%, implying the market expects it to be cut.
However, Berenberg is aware of the problems with the sale of the book division and nonetheless leaves its dividend forecasts unchanged.
Analysts at Berenberg have downgraded Connects earnings per share by 11% and 10% for 2018 and 2019 to 14.1p and 14.4p respectively.
More positively, Berenberg says ‘While the weaker trading reported today is clearly a negative, we continue to believe that Connect’s strategy of integrating the cost bases of News Distribution and Mixed Freight remains the right one, and we believe it positions the business for a future return to growth’.
Using Berenberg’s forecasts, Connect is trading on 5.3 times 2018’s 14.1p of earnings.
