Good morning!
I was just thinking how it was unusual not to see any profit warnings today, as they seem to be coming thick and fast on most days - which makes me nervous, given the high valuations a lot of small caps are currently rated at.
Then out pops a profit warning at 10:51 today;
DX (Group) (LON:DX.)
Share price: 42.25p (down 50% - but moving fast)
No. shares: 200.5m
Market cap: £84.7m
(at the time of writing this section I did not hold any shares in DX.. However, when they dropped further in price, I bought some - as explained below)
Profit warning - this is a courier firm, which floated in Feb 2014. It has looked an attractive value share for a while, with a PER and divi yield both around 7. However, things are cheap for a reason, and in this case I've kept away from it because the operating margin looked suspiciously high, given that it operates in a highly competitive sector. High margins don't usually last long, as competitors chip away at them.
So what's gone wrong? The company says that trading patterns in H1 have deteriorated. In this case, its financial year end is 30 June, so H1 is Jul-Dec inclusive.
In particular, the DX Exchange operation is experiencing a higher than expected level of volume erosion and there have been increased cost base pressures, mainly arising from driver resourcing issues (where there is an industry wide shortage). In addition, the new business pipeline in our parcels operation, while healthy, is converting more slowly. This means that while revenues for the first four months are 5.3% down against the prior period, the Board now expects that profits will be significantly below current market forecasts. The balance sheet remains robust, with low levels of net debt (30 June 2015: £1.8m). The Board anticipates the dividend payout for the full year to amount to 2.5p per share.
So to summarise;
- Volumes declining at DX Exchange faster than expected
- Higher cost of employing lorry/van drivers (due to industry shortage)
- Parcels - new business pipeline converting more slowly
- Revenues down 5.3% Jul-Oct 2015
- Profits significantly below market forecasts
- Dividend being slashed from 6.1p expected, to 2.5p
That's pretty bad, which the market has reflected by halving the value of the shares in the last 20 minutes. Dividend seekers in particular will be gutted by the slashing of the divis - it just goes…
