Tougher trading
Previously we highlighted the scale of the investment programme being undertaken in the business during 2019. This investment in headcount and IT infrastructure has been accelerated in order to reflect opportunistic events, notably a large customer providing notice on an existing contract and preparations for a ‘no deal Brexit’. Unfortunately trading in several businesses has failed to match previous expectations, which would have otherwise covered the rising costs.The E-commerce division has suffered the most in terms of trading, with approximately half of the reduction in divisional EBITA due to the investment required by a large forthcoming contract framework with a sizeable customer. The combination of the higher costs associated with expanding the number of geographies within the franchise network for EshopWedrop and flat revenues have resulted in a modest reduction in profitability versus previous expectations.
Within the Logistics division, more than half of the divisional profit shortfall reflects the decision by a customer of Delamode UK to exit the Group’s large facility in Braintree, Essex. As a result, management has decided to upgrade the facility to enable higher margin fulfilment capability, replacing the current low margin storage offering. Unfortunately, in the meantime the facility will need to temporarily close in order to carry out the upgrade.
Trading elsewhere has performed at least to budgeted expectations. Both Anglia Forwarding and Pallex Romania continue to perform strongly, with the recovery at Benfleet ongoing. The smallest division, Affinity Transport Solutions continues to trade well and in-line with expectations.
As such, we have reduced EPS estimates by 25.5% in FY19 and by 13.3% in FY20. Owing to ongoing strong cash generation, we now anticipate net cash at the year end to be £4.1m. Our DCF and dividend discount model suggest a fair valuation of 60p /share, which would give a FY20F PER of 12.3x and a FY20F PEG of 0.3.
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