Why UK Mail Group PLC Is Falling Today

UK Mail 2UK Mail (LSE: UKM) the largest independent parcels, mail and logistics services company within the UK, is falling today, having dropped over 15% in early trade. The company warned this morning that group revenues for the first half of the year are expected to be 1% lower than the same period last year. 

Indeed, the group reported that while performance during the first quarter of the year met expectations, the second quarter has been more challenging with parcels volumes below expectations.

As a result, group first-half revenues are expected to fall. However, adjusting for there being one less working day in the period, underlying revenues are expected to be in line with the previous year.

On the plus side, UK Mail did report an increase in volumes across its parcels and mail division. Unfortunately, in this case, volume growth did not translate into revenue growth. During the period parcels volumes increased by 6% and mail volumes increased by 2%. 

Nevertheless, management did reveal today that the group’s strategic investments are still progressing to plan. In particular, the company’s new automated hub remains on track to be operational from May 2015, which should lower costs and create extra capacity. 

Worrying trend 

Today’s news from UK Mail shows that the group continues to make progress, despite sluggish revenue growth. Further, with the volumes of parcels shipped rising, it seems as if the group is stealing market share from Royal Mail (LSE: RMG).

For example, Royal Mail reported earlier this year, within its own trading statement that revenue for the first three months of the year would expand at a slower rate than expected. This slowdown was blamed on a weaker-than-expected performance within the group’s UK parcel division.

Additionally, Royal Mail warned that given the rising competition within the parcel sector, parcels revenue for the full year is likely to be lower than anticipated. Still, management stopped short of issuing a full profits warning. 

So, it seems as if UK Mail is encroaching on Royal Mail’s turf, which could spark a full scale price war – something neither company wants. 

Attractively priced 

Before today’s declines, UK Mail did look expensive as investors were willing to pay a premium in order to get their hands on the company’s shares. Actually, the last time I wrote about UK Mail, the company was trading at a forward P/E of 17.1, with a dividend yield of 3.6%.  

After today’s declines UK Mail now trades at a more attractive forward P/E of 14.7, which is not cheap. However, earnings are expected to expand at around 10% per annum for the next two years, the valuation is not overly demanding. 

Still, even after factoring in UK Mail's double-digit growth rate, the company may be too expensive for some investors. The trouble is that most growth shares with bright prospects tend to trade at similarly high valuation multiples.

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Rupert does not own shares in any company mentioned.