UK Mail delivers parcels warning

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UK Mail delivers parcels warning
Casting doubt about the strength of the UK parcel sector, UK Mail (UKM) has warned that weak performance on that side of its business could represent the start of an industry-wide slowdown. That admission sent shudders through the City and UK Mail's share price plunged as much as 16% to a 15-month low at 472p.

UK Mail expects its November interim results to reveal growth in average daily parcel volumes of just 6% following a weak second quarter.

After the summer months, the parcel sector should enjoy some seasonal uplift, but the group warned that it was too early to tell whether the fall in parcel volumes at the end of the reporting period is a "persistent trend" that could damage full-year results.

Half-year group revenue is expected to fall by 1%, blamed on there being one less working day in the period. Underlying revenues should be flat. Management have warned that, due to mix changes, revenues from its Mail business may be down 6%, despite average daily volumes rising 2%.

At the beginning of 2014, experts expected significant expansion in the parcels sector this year and beyond, but this slowdown could nip the sector's transformation in the bud.

The update spooked the market, and UK Mail's share price has slumped from 715p in February to just 486p. Royal Mail (RMG) has been caught in the fallout, too, sending its shares to a new low at 397p.

Investec has downgraded its recommendation from 'buy' to 'add' and taken its price target back to 600p from 700p previously.

Until it gets "more clarity" on the issues, the broker has also shrunk its forward pre-tax profit guidance to £22 million, giving earnings per share (EPS) of 31.8p. UK Mail is trading on a price/earnings ratio of 15. Hardly cheap.

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