Good morning!

The final list turned out to be:



Connect (LON:CNCT)

  • Share price: 34p (-8%)
  • No. of shares: 248 million
  • Market cap: £85 million

Trading Update

This distribution/logistics business has been plagued with poor performance, See our comments in June for a refresher.

Today we learn:

  • Smiths News (newspaper and magazine wholesaler) - shows "resilience", newspapers holding up but magazines "weakening a little" in Q4.
  • Tuffnells (delivery of awkwardly shaped objects) - H2 performance expected to be worse than H1.

Connect purchased Tuffnells in 2014 for £139 million, in a fine example of a misguided attempt by a company to diversify its operations.

There is a logic which says that a company which has diversified its activities has reduced its overall risk. I totally disagree! The way to reduce risk, in my opinion, is to improve your advantage relative to your competition. This is more easily done when you focus on one particular activity!

Glen Arnold, in his Deep Value Investments newsletter, assigned a value of zero to Tuffnells in June. Senior staff from Tuffnells have apparently found their way over to DX (Group) (LON:DX.) 

  • Pass My Parcel - this "Click and Collect" operation winding down faster than expected with additional operating losses in the FY 2018, but lower costs in FY 2019. Good news.

Elsewhere:

  • the company is making a provision (up to £1.5 million) in relation to underpayment of the minimum wage
  • new CEO from 1 September. New provisions for further restructuring costs.
  • fined £1.5 million in relation to a fatality at a depot in January 2016.
  • trading performance expected below expectations

My view

Despite all of the gloom, I'm not yet convinced that this company is destined to go under. 

The most important part of it, Smiths News, sounds like it is doing ok. Connect also owns a distributor of newspapers and magazines to airlines, which I understand to be profitable.

The problems are being caused by all of its…

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