Zeus Capital Equity Research Director Andy Hanson caught up with DirectorsTalk to discuss DX (Group) PLC (LON:DX)
Q1: Now it’s been a difficult year for DX (Group) PLC, why has it been so tough for them?
A1: Yes, it has been a very difficult year for them, obviously year end’s June and last November we had quite a big profits warning from the business. So really two factors drove the profits warning, one was increased costs predominantly driver costs and the second related to the DX Exchange business which is very high margin but in structural decline. We’ve known it’s been in structural decline because of e-substitution for quite some time and the rate of decline in that business increased, I think most analysts had about 6% decline, and we got confirmation that it was declining at about 10% a year so that led to a down rated forecast back in November so since November it’s been about rebuilding investor confidence in the business.
Q2: So full year results have just been published, how do they look?
A2: Obviously year on year DX (Group) are down quite a lot at the profit level, their revenues broadly in line, just down 3% year on year but the full year results were more about this rebuilding of confidence in the business. The interim results there was a general consensus in the market between £18-£19 million EBITDA for the full year and they’ve come in and met that estimate with £18 million, revenues are broadly in line with my forecast, the difference being about 1%, as I say EBITDA is broadly in line and the PBT of £11.5 million against my £11.6 million, again it’s broadly in line. So the results actually look pretty good and management have met the estimates that were in the market back in February.
Q3: Looking forward then, what are the important things to look out for next year for DX (Group)?
A3: 2017 could prove a really pivotal year for the business, not just in the case of rebuilding investor confidence and seeing profitability improve but there’s 3 distinct things I would look for:
Firstly, they have an important contract with the Passport Office, secure delivery of passports, they’ve had it for some time, the incumbent on the contract. The contract is currently going through a tender process, DX (Group) are well placed because of the performance that they’ve achieved as the incumbent but there’s no certainty that they’ll win that contract. If we do get confirmation that they’ve won it, it will improve earnings over the forecast period, over the next three years, we’re hoping to get some acknowledgement of that by November.
Secondly, they’ve had issues with the new hub, they were planning to build a new hub in the Midlands, planning permission got refused so we’ve kind of had this hiatus in news flow on it, they have resubmitted planning application and if we get positive developments with regards to the new hub I think people will look more favourably in the potential for revenue synergies and cost synergies coming from that new hub as we progress out through the forecast period.
The third, I think, important thing is this decline in the exchange business after the increase last year, I think if we can get comfortable that the deterioration isn’t increasing, that should be taken positively.
