UK Mail needs to deliver to sustain rich pay-out

UK Mail said last week it had “made a solid start to the current financial year” as first-quarter results published on June 30th were “in line with our previous expectations.”

While financial details were not disclosed, it said “the move of our second hub has been successfully completed, with very high service levels maintained throughout the period. We continue to make good progress with our plans to improve the efficiency of our operations.”

Those remarks were not enough to boost confidence in its shares, which are priced at 316p and are trading only marginally higher than the level they recorded before the announcement was made, despite receiving a boost from favourable stock markets in recent days.

The shares are up 17% year to date, but their valuation remains almost 40% down over the past 12 months, when two profit warnings led to the resignation of chief executive Guy Buswell in November.

By comparison, the shares of its much bigger domestic rival, Royal Mail, which dwarfs UK Mail by market cap, are 8% off their 52-week high.

As with most parcel and mail operators, the resilience of the UK Mail share price on the stock exchange continues to hinge on the solid income streams from steady dividends.

The group, which boasted net cash of £2.2m at the end of fiscal 2016, now remains “in a sound financial position,” it said in its annual results dated May 24th, although operational headwinds are apparent and could determine a less generous dividend policy over time.

Its final dividend was 10.9p per share in fiscal 2016, compared with 14.5p in 2015, and amounted to 66.4% of its 2016 annual dividend of 16.4p. In 2015 the annual dividend was 21.8p.

That implies a trailing pay-out ratio of 76%, which will likely remain similarly high this year given consensus estimates – analysts expect mildly higher EPS and dividends per share this year. According to these measures UK Mail stock would carry a forward yield of 5.5%, based on its current price.

Cost cuts are likely to be on the cards in the wake of Brexit, particularly if its operating performance doesn’t improve; revenues and EBIT are only expected to be back in line with comparable figures for fiscal 2014 by fiscal 2019.

Its annual results for the year ended March 31st showed that revenues were down 0.8% year-on-year to £481m, with pre-tax income before exceptional items falling 51% to £10.7m, in line with guidance. Underlying earnings per share, which also exclude exceptional items, also halved year-on-year.

UK Mail added that its new automated hub was “operating well with high service levels”, following a period “of major transition” during which its parcel delivery services had to cope with a move to a new processing facility.

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Source: Transport Intelligence, July 20, 2016

Author: Alessandro Pasetti