Connect Group crashes 67% after horrific warning

After losing as much as two-thirds of its value after an appalling profits warning and boardroom cull, Graeme Evans reveals whether the selling is overdone.

As profit warnings go, it's hard to think of many more savage in recent times than today's from newspaper distributor and parcels firm Connect Group.

Shares slid over 60% to a new record low at under 17p as the company - still regarded by many as Smiths News - materially reduced full-year forecasts, warned of a substantial dividend cut and said it was closing one of its key businesses.

On top of that, Connect's long-time CEO Mark Cashmore is stepping down and the finance director has left the business with immediate effect.

It all adds up to a big mess for shareholders, who have only just come to terms  with a profits warning in January when Connect cut earnings forecasts to as low as £42 million compared with market hopes for £49 million.

Source: interactive investor          Past performance is not a guide to future performance

Broker Berenberg now predicts profits of £30 million in 2018 following a 30% cut to its earnings per share forecasts in the period up to 2020. It assumes this will result in an 80% cut in the full-year dividend to 4.4p this year and 2p in the following two years, compared with 9.80p paid in 2017.

Given the trading performance and departures of the CEO and CFO, Berenberg warned that the outlook and investment case for Connect was unclear as it downgraded to a Hold recommendation and cut its price target to 40p. Shares started this year at 112p but now stand at just 28p.

One of the biggest challenges facing Connect has been the performance of freight business Tuffnells, which serves about 5,000 SMEs from 37 depots across the UK. 

It made a small loss in the six months to February, but hopes of an improvement in the seasonally busier second half of the year have been dashed after revenues fell 12.3% in the past three months.

Tuffnells was acquired by Connect in 2014, with shareholders raising £55 million through a rights issue to pay for the 100-year-old business. At about the same time the parent company launched its Pass My Parcel business in conjunction with its first client, Amazon UK.

Now the click-and-collect operation, which serves internet and high street retailers, is to be shut down after failing to generate acceptable margins. The loss-making venture will saddle Connect with closure and onerous contract costs in the 2019 financial year.

Sales of core newspapers and magazines remain in line with expectations at Smiths News, although this has been offset by weaker than expected sales of World Cup sticker albums and stickers. Smiths has a 55% share of the UK market, distributing 35 million newspapers and 11 million magazines each week.

Today's latest profits warning means the end of the road at Connect for Cashmore, who has been on the board ever since the company's demerger from WH Smith in 2006. The business changed its name to Connect in 2014.

Having already announced plans for his departure, chief financial officer David Bauernfeind will go immediately and be replaced from Monday by interim CFO Tony Grace. Most recently, Grace was CFO at logistics firm Yodel, and previously held senior roles at Virgin Media and Telewest.

Berenberg said: "With the failure of the company to turnaround repeated poor performance in Tuffnells, as well as the departures of both the CEO and CFO, we believe the outlook and investment case for Connect to be unclear at present."

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.