UK Mail provides express collection and delivery services for parcels, mail and palletised goods. The group’s customers include banks, supermarkets, telecoms businesses and government. The business works by collecting parcels and mail, which are sorted at the group’s sort centres before mail items are delivered the next day to a Royal Mail centre for final delivery. Parcels are delivered to businesses and residential locations across the UK. They have now released their final results for the year ending 2014.
Overall revenues increased during the year, mainly driven by a £30.6M hike in parcels sales and helped by a £3.7M growth in mail revenue, only partially offset by small falls in Courier and Pallets revenue, although it should be pointed out that this year contained four extra working days than last which seems to have had an effect on sales and profits with up to a £2M increase in the latter attributable to this phenomenon (before tax). Subcontractor costs and wages both increased too to give a gross profit £13.5M higher at £68.2M. Operating lease rentals increased slightly, as did repairs and maintenance with a £500K charge for R&D occurring this year that did not happen in 2013 and other admin expenses also increased, up £7.2M and after some fairly insignificant finance costs, the profit before tax was £5M higher at £22.8M before the tax charge brought this down to a £17.5M profit for the year, an increase of £4M when compared to last year. It’s worth noting though that the some £300K received in operating lease rentals may be coming to an end as an investment property being sublet has a lease that is due to expire.
When compared to the end point of last year, total assets increased by £24.9M, driven by a £12.8M increase in freehold land and buildings, a £5.1M growth in trade receivables, a £3.7M increase in vehicles & equipment, and a £3.2M growth in internal software developments. Liabilities also increased during the year due to an £11.5M increase in deferred compensation due to re-imbursements connected to the expenditure, business disruption costs and capital expenditure resulting from the compulsory purchase of the group’s national hub due to HS2 construction, a £3.2M growth in trade payables, and a £2.7M increase in other payables. The end result is a £4.8M increase in net tangible assets to £54.8M which seems pretty good to me but it is worth noting that off balance sheet operating leases did increase and if they were to be included as liabilities, net tangible assets would have fallen by £1.4M to £18.4M.
Before movements in working capital, cash profits increased by £6.9M to £31.7M. An increase in receivables was counteracted by an increase in payables so that the cash generated from operations increased by £2.1M to £33.2M. After tax, this was down to £28.2M, a £1.2M increase on last year. The vast bulk of this cash, £23.5M, was spent on property, plant and equipment with a further £4.6M being spent on intangible assets relating to greater IT spend, before £10.6M received in deferred compensation meant that the cash flow before financing stood at £10.8M, all of this was spent on dividends with the finance lease payments pushing the cash flow into a negative £800K to give a cash pile of £27.4M so plenty of headroom there and it is good to see that the huge increase in capital expenditure was still covered just about by operational cash flow.
Operating profit at the Mail segment was £12.7M, a £2M increase when compared to last year. There was a positive uplift in mail volumes driven by strong customer retention and new business wins, as the group’s volumes grew 2% against a backdrop of a market that fell 5%. Operating margin improved from 4.4% to 5.2% and the segment has a healthy pipeline of new business opportunities. During the year the group invested in two new mail sorting machines costing £900K in order to increase the efficiency of their operations. Imail, the group’s web to print postal service showed healthy growth with monthly volumes in excess of 2M. Additional services such as high speed insertion and a brand new website providing customers with enhanced personalisation options, innovative data services and a new suite of products have been introduced and the success of the offering means that the group have become the fastest growing digital printer of their type in the UK. One area of expertise is small run printing and the group have decided to build on this to create “imailprint” which is a specialised printing service which can produce printed documents for general usage which the board see as a low risk, medium term growth opportunity.
Packets represent an exciting new growth area for the group and they have recently launched a new packets service, based on a new agreement with Royal Mail which will allow them to offer customers a two/three day, low cost delivery service. The agreement enables the group to collect packets, using their nationwide network and sort them for final delivery for Royal Mail. This combination allows the group to provide a profitable product to customers which can compete with the “lifestyle” couriers who provide a basic service at a low cost. It is estimated that some £200M of the total £1.2BN packets markets is currently handled by these lifestyle couriers. The board expect this new product to make a positive contribution next year with good medium term growth prospects once they are fully established in the market.
The Parcels business’ operating profit increased by £6.1M to £22.4M. There was strong growth volume in both the B2B and B2C markets throughout the period with daily volumes increasing by 19% compared to last year. This increase was driven by both good customer retention and a number of customer wins but there appears to be an on-going volume mix change towards the lower margin B2C segment. This strong growth in volumes improves the operational gearing of the division so despite the change of the mix towards B2C and the competitive pricing environment, margins in the segment improved from 8.6% to 10.2%
Following the opening of the specialist distribution centre last year, the group have now introduced automated sorting capabilities for hanging garments as well as improved software which allows them to combine the parcels and courier networks. One of the group’s brands, ipostparcels, is a low cost online collection and delivery service where growth slowed year on year as it became more established but Christmas volumes were double those achieved the year before. The overall UK parcels market is growing rapidly but remains highly competitive but the group continues to win new customers and has expanded three sites in their network with up to eight highlighted for expansion next year. In March an enhanced next day delivery service was introduced that will offer advance notice one hour delivery and collection windows that can easily be re-arranged and includes a texting service to inform customers that their delivery is ten minutes away. Going forward, management expects Parcels growth to slow next year as capacity is partially constrained ahead of the above mentioned expansion.
Operating profit at the Courier business increased by £100K to £2.7M with an improving trend in revenues throughout the year. Reduced operating costs helped increase the operating margin from 15.5% to 17%. The group are continuing to focus on national contracts that can leverage the network and blue chip customer base. The courier network also provides the istore service which involves the local storage of parts and components for which service engineers need easy access to complete timely service jobs. The group provides the storage facilities in their parcels depots and the courier delivery service to the engineers. This is a growing market in which UK Mail have developed a market leading position.
Operating profit at the Pallets business was £900K, an increase of £100K when compared to 2013. It is based on a network of members and during the year the group experienced temporary gaps in the network which reduced input volumes and gave rise to additional delivery costs. The gaps were resolved but it is taking time for new members to achieve the sales volumes that would be expected from established members but operating profits have started to recover as these plans have taken effect. The board are convinced that the changes made to the business can make it successful in a market with good long term growth prospects. The operating profit margin for this division is just 3.3%, albeit an improvement from the 2.7% last year.
Management see the integrated network of the parcels, mail and courier businesses as a key differentiator in the market which allows the group to provide services that other providers cannot and this year has seen the courier business become integrated with the others. The group continued to invest in IT during the year and have introduced new data services and information to the end user with a key change being the introduction of one hour delivery slots. About 20% of parcels volume are handled through automated facilities and the group intends in increase this to about 80% going forward which will involve the installation of further automated sorting equipment which has cost £3.3M this year and is expected to cost £16.7M next year with the total expected to be spent on land and buildings next year being some £35M, so this is a substantial investment for a company of this size. The benefits of this investment are expected to be seen from September 2015 and it is estimated this this machinery will increase the central sorting capacity by 45%.
There were no customers that accounted for more than 5% of revenue so there seems a good mix of clients. As with most companies, though, there are some risks to consider. Due to the nature of the business, the group is susceptible to the general health of the UK economy and Royal Mail access cost represent a significant expense for the groups so they would be susceptible to any changes in this, although it is likely that they will be controlled by Ofcom to encourage competition. The move to the new hub also comes with risks with potential unexpected costs and the possibility that management may be distracted from the day-to-day objectives to manage the move. IT is also a very important part of the group’s operations and any interruption in these systems would be pretty disastrous.
The group does seem to have quite a lot of capital commitments totalling £29.9M and consisting of £17.1M in assets under construction and £12.8M under property, plant and equipment. The vast majority of this expenditure will be incurred next year and it corresponds to no such commitments at the same point of last year.
As can be seen above, the group have had to relocate their Birmingham hub as a result of the HS2 link. After an initial delay, a contractual agreement has been reached with the Secretary of State for Transport and they have commenced construction of a new enlarged regional hub near Coventry which should be fully operational by September 2015. The group have agreed £9.5M for their current Heartlands site, £8.6M of which has already been received and £900K when they fully vacate the site, expected to be in late 2015. It is expected that the costs of the move to the new site such as the IT data centre move and related staff costs that are occurring over the next two years will be compensated by the DfT. The new automated hub should create extra capacity and reduce operating costs but there will be short term challenges involved with the move.
In April Carl Moore joined the board as Group Operations Director having been with the group since 2007 serving as Network director, before which he was held a number of senior positions in parcel distribution companies across the UK.
At the current share price the company trades on a P/E of 16.8 which increases to 17.1 on next year’s forecasts which doesn’t look all that cheap. After increasing by 13.3%, the shares yield a decent 4%, covered 1.5 times by earnings, with the yield increasing to 4.1% on next year’s consensus forecast. The group have a net cash position of £27M with no debt which was the same as at the end of 2013, they also have an undrawn overdraft facility of £5M and an undrawn committed money market facility of £7M in place until the end of November 2014. To provide funding for the investment in the new hub and automation the group has now put in place a £25M five year revolving credit facility so it looks like they are going to invest more than their cash reserves.
Overall then this seems to be a decent update. We have seen profits up, mainly due to more sales at the parcels business and the extra working days this year. Net assets improved slightly but an increase in operating lease liabilities negates this improvement. Operational cash flow improved but it was all swallowed up by capital expenditure leaving the compensation from HS2 to pay the dividends. The mail business seems to be doing very well in a declining market with some interesting innovations that are venturing into marketing but management expect growth to slow at the star performer, parcels. So, next year we are likely to see a slowdown in parcels growth and a big increase in capital expenditure, the benefits of which will not be seen until towards the end of 2015. In conclusion, this is a company I like but I feel the timing is not quite right here yet so I will wait and see what happens.