Gamble of the week: An innovative parcel service

By Paul Hill Dec 20, 2011

Paul Hill

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Are we seeing a tipping point for the high street? Shops are closing nearly every day as consumers tighten their belts and opt to spend online to save petrol and snap up bargains. The €80bn UK e-retail market is climbing at 15% a year and now represents 10% of all retail activity. One beneficiary of this shift in buying habits is UK Mail, the country’s largest independent parcel, mail, courier and pallet company.

It competes against Citylink, DHL, the Royal Mail and TNT, yet saw an 11% jump in parcel volumes in the first half year, thanks to demand from platforms such as eBay and Amazon. The board is seeking to win even more internet traffic as it launches new services and builds its relationships with major retailers in the £1.2bn logistics market.

The key to success will be offering reliable next-day delivery with narrow time slots. UK Mail can rise to that challenge, given its recent IT investments in e-commerce. The firm has also just launched a new consumer-facing website (Ipostparcels.com), which allows families and small businesses to send packages directly from their homes. That taps a mini gold-mine potentially worth £400m a year and a market expanding at a 10% annual clip.

Meanwhile, at the company’s imail unit, demand trebled between January and September to more than 700,000 deliveries a month. This clever service allows people who wish to send physical letters to do so over the web. For a small fee, imail will do all the hard graft of printing, posting and delivering documents. All a user has to do is script a personal message and press a button. It should certainly take out a lot of the leg-work in hand writing and addressing Christmas cards.

UK Mail share price 

The logistics industry can be tough. Margins at UK Mail’s letters division were trimmed in May after a 20% hike in wholesale charges from the Royal Mail for “last mile” distribution. Elsewhere, business-to-business volumes remain subdued, and the company is also exposed to the more cyclical areas of courier and direct marketing. However, the board has still squirrelled away £11.6m of net cash and the interim dividend was held at 6.4p a share.

For 2011/2012 the City is forecasting turnover and underlying earnings per share (EPS) of £419m and 20.5p respectively, rising to £430m and 21.7p 12 months later. That puts the shares on a cheap ten times earnings. The shares also offer a 9% yield for income-seekers.

I value the group on an eight-times earnings before interest, tax and amortisation multiple. Adjusting for the firm’s cash, that generates an intrinsic worth of 250p a share. The next trading update is due out in January.

Recommendation: BUY at 200p (market capitalisation £110m)

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