Connect Group warns on profits, announces CEO and CFO exit

The distribution and logistics provider highlighted a material drop in volume and increased cost through the peak for specialist irregular dimensions and weight (IDW) freight/parcel handler Tuffnells, higher costs in Pass My Parcel, disappointing sales of World Cup-related products in Smiths News and delays in realising planned cost savings across the group.

Connect said that as reported last month, the IDW market is currently volatile. For the first three months of the second half, Tuffnells' external revenue was down 12.3%, while year-to-date revenue is 3.9% lower.

"This has a disproportionate impact on profit for the full-year as the need to maintain Tuffnells' core service means costs cannot reduce in line with the shortfall," the company said. "We now expect Tuffnells full year performance to be no better than the first half. As a consequence, the group expects to impair the intangible assets of the business."

Connect also said it has decided to end the click and collect service Pass My Parcel after a careful review, and wind down its associated network of local retailers. It is currently in discussion with key clients to effect as orderly a withdrawal as possible. In the meantime, it is working to ensure costs can be removed in line with the profile of the closure of operations.

In light of the revised profit expectations, the dividend for FY2018 will "at a minimum be substantially reduced from that paid in FY2017".

The company also announced on Wednesday that chief executive Mark Cashmore will be stepping down from his position, while chief financial officer David Bauernfeind will leave with immediate effect.

Tony Grace, who was CFO at Yodel, will join the group as interim CFO from Monday 18 June.

Russ Mould, investment director at AJ Bell, said: "Overall the situation is embarrassing for the business previously known as Smiths News. Six years ago it was faced with a core business in steady decline (magazine and newspaper distribution). That prompted a move into new areas such as education supplies before settling on parcel freight as the future of the business alongside maintaining the media distribution interests.

"A new leadership team may need to think of other ideas in order to rejuvenate the company."

Berenberg downgraded the stock to 'hold' from 'buy' after the update, slashing the price target to 40p from 140p as it cut its 2018-20 earnings per share estimates by around 30%. The bank said it assumes an 80% cut to the dividend going forward resulting in a full-year dividend of 4.4p in FY18 and 2p in FY 2019/20.

"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."

At 1300 BST, the shares were down 44% to 29.10p.