Shares in UK Mail fell 11 per cent after the postal operator cut its interim dividend by a quarter and warned of a “softened” financial performance next year, following further difficulties at its new automated sorting hub.
The company, which competes with the likes of Royal Mail in the crowded parcel delivery market, said that inefficiencies at its new facility and in its transport network had caused additional costs and the loss of customers.
This contributed to an 82 per cent plunge in pre-tax profit for the half year ending September 30 to £2.2m, against £12m in 2014.
Guy Buswell, chief executive, said: “The current period of major investment and transition will deliver significant long-term benefits . . . However, due to the timescales required to fully resolve the challenges, our expectations for the next financial year have softened slightly.”
As a result of the squeeze on earnings, UK Mail’s board declared an interim dividend of 5.5p per share, down from 7.3p last year. Investors sent its share price tumbling to a nearly three-year low of 324p.
UK Mail’s operational turmoil has been triggered by what it says is the single most significant strategic development in the group’s history: the move of its Birmingham hub and head office to a £20m new facility with automated sorting technology in Ryton, near Coventry.
Yet the company said the equipment was “incompatible” with a large number of parcels as it issued a profit warning in August and lowered its pre-tax profit guidance to a range between £10m and £12m compared with consensus forecasts of more than £20m. This remains intact for the year.
Alex Paterson of Investec said UK Mail’s recovery was “slightly slower than expected”, even though underlying profit was 30 per cent ahead of the analysts’ forecasts.
Rival carriers have been investing heavily in new hubs and expanded networks, creating extra capacity that analysts believe will push down delivery prices.
An indication of the intensifying competition came last week as DX Group, which provides next-day delivery for mail, parcels and heavier items across the UK and Ireland, blamed pricing pressure and a shortage of drivers as it warned on profits.
UK Mail, founded in 1971 by current chairman Peter Kane, says it is the country’s largest independent parcels, mail and logistics services group, with almost 3,000 delivery vans that move parcels for clients including O2 and TalkTalk.
It has long promised that its new hub, which features a warehouse the size of 2.5 football pitches, would increase its efficiency and its profits.
Although revenues at the company’s parcels business — which accounts for more than half of sales — were up, higher operating costs and a move towards the less profitable consumer market saw the division’s operating margin slide by 4.4 percentage points to 6.3 per cent.
Group sales were up 4.5 per cent to £237.6m in the period and the decline in profit was mitigated by a payment of £11.9m from the Department for Transport to compensate for forcing UK Mail to relocate its hub away from the proposed HS2 route. A further £10.3m will be paid in December.
Additional reporting by Peter Campbell and Joel Lewin