Shares in logistics company Connect (CNCT) have collapsed after the company was forced to slash profit guidance thanks to trading falling apart last month.

At midday the stock is down more than 45% at 28.35p, making it by far the biggest loser on the entire FTSE All-Share market.

Management called the company's performance since interim results on 1 May ‘extremelv disappointing’ but investors may well be left wondering why this has come as such a surprise.

WARNING SIGNS

First half results to 28 February were a disaster, showing a 42.4% slump in pre-tax profit to £9.5m, compared to the same period last year. Those poor figures followed on from a previous profit warning in January.

Both chief executive Mark Cashmore and chief financial officer David Bauerdfeind have been forced out, the latter immediately.

AJ Bell’s investment director Russ Mould says the delivery industry has experienced problems for some time with a shortage of drivers amid the rise in e-commerce related orders. This shortfall has resulted in higher salaries for available drivers thus pushing up costs.

‘However it seems that many operations are still being run inefficiently across the industry with reports of depots experiencing delays in getting orders out. The knock-on impact of this situation is that the best delivery companies are picking up more work and the worst are losing out if they’ve developed a bad reputation for service’.

FIXES HAVE NOT WORKED

Connect was previously the Smiths News business. It has been staring magazine and newspaper distribution declines in the face for years as readers increasingly switch to the internet. Shares warned investors about the company's challenges a year ago.

Today’s update suggests that the ‘fixes’ to these key problems have not worked, shown with the decision to shut its Pass My Parcel division and wind down the associated Parcel Shop network.

The focus on the IDW market (odd-shaped and heavy parcels) has not paid off as it is volatile unpredictable. The Tuffnells Parcel Express business is also losing money.

Connect says ‘We now expect Tuffnells full year performance to be no better than the first half. As a consequence, the group expects to impair the intangible assets of the business’. For the company’s first half results, there was already a £1m impairment of intangible assets on the balance sheet, the news on Tuffnells suggests this is going to increase the losses suffered by the company at year end.

ANALYST'S VIEW

Eoghan Reid, analyst at investment bank Berenberg, says Connect required a significant turnaround from its Tuffnels business in the seasonally busier second half. Reid adds that it is ‘prudent to not forecast a recovery in the Tuffnells margin until Connect has shown evidence of its trunaround’.

Using Berenberg’s forecast’s Connect trades on 2.8-times 2018’s earnings while paying a prospective dividend yield of 16.6%. The company has already said that its dividend for the full year will be substantially less than the sum paid last year so the yield figure is clearly nonsense.

The analyst also says that ‘we believe the outlook and investment case for Connect to be unclear at present’.


Issue Date: 13 Jun 2018