UK Mail’s New Automated Delivery Problems Cause Profit Warning

UK Mail delivery lorryDifficulties at new headquarters see share price slide

Far from improving and streamlining its service, UK Mail’s new hub near Coventry has, at least for the time being, caused the parcel delivery company losses of profits, customers and company value as the share price has dipped in the wake of their problems.

  • Company: UK Mail – www.ukmail.com
  • CEO: Guy Buswell
  • Stock: UKM (LON)

What is the problem?

The fully-automated facility in Coventry – which UK Mail moved into from their previous premises in Birmingham – has incurred unexpected additional costs after the new site was shown to be ‘incompatible’ with a large number of the parcels it handles.

Extra costs to try and solve the new site’s problems and lower profit margins have combined to cause the company’s current financial woes; profits have reduced to just under £8 million, although revenues are up. Profits from letter delivery also fell by some 17% down to just over £5 million despite revenues rising.

Competitive market

The mail delivery market is highly competitive for UK Mail at present; they’ve cut prices to win contracts and are locked in a fierce battle with Royal Mail. There’s also the declining demand as people are using email and social media rather than traditional paper mail.

Parcel delivery companies are facing challenging times even though volumes are high, largely thanks to the ever rising demand due to online shopping. City Link collapsed during the 2014 Christmas period, and the DX Group issued a profits warning recently citing a combination of price pressure and the increased costs of recruiting drivers. Also, with new service providers such as Quick Envelopes appearing, it is becoming harder for mail companies to profit through selling extras such as stationary and envelopes.

Ironically, the collapse of rivals such as City Link didn’t really help UK Mail. Although it led to a rise in the number of parcels it dealt with in the first quarter of 2105, it couldn’t efficiently handle the extra workload with its existing resources which led to an increase in costs.

How poor is UK Mail’s financial performance?

The company has cut its dividend and warned that profits will be lower than expected this year and next – they were down by half in the first six months of the 2015 accounting year (to the end of September). Pre-tax profits fell markedly from £11.2 million in the previous year to £4.9 million, and the company cut its dividend to 5.5p a share from 7.3p.

The company’s chief executive said profits this year would likely meet the reduced forecasts, but next year’s results would be worse than expected due to the “timescales required to fully resolve the challenges”.

Since the profit warning, shares in the company have dropped by a considerable 40%.

New facility will still benefit long term

The company maintain that its new Coventry site will benefit UK Mail’s business long term despite the difficulties experienced. The company’s chief executive has previously commented that the new hub is the largest strategic development in their corporate history, and that it will help the company become one of the most competitive and efficient operators in their market.

UK Mail has been in business over 40 years having started life in 1971 as a taxi company. It is still under its original chairman, Peter Kane, and now operates out of 52 national depots and runs a fleet of over 2,000 delivery vans.

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