Business Post mails it
The conundrum at the heart of Business Post’s (BPG) story is inexorably rising sales and range-bound profits. The conundrum at the heart of Business Post’s (BPG) story is inexorably rising sales and range-bound profits.
I think it explains why, judging by the share price, investors have gradually tired of the company, even though it’s an innovator in a fairly solid sector: parcels, and mail.
From its recent annual report Business Post’s mostly business-to-business parcel service accounts for 45% of sales, mail accounts for 43% and specialist services like its courier service and pallet delivery account for 13%.
But the mail service has grown from a standing start in 2004 when Royal Mail gave up part of its monopoly. Then Business Post’s UK Mail division became the first company to collect and sort letters in competition with the Royal Mail, which still delivers them. Now Business Post collects 17% of the UK’s mail, 70% of which it describes as ‘statement’ mail, from just 1,000 companies.
By focussing on the really big mailers and using its parcel network to collect, UK Mail achieves economies of scale, but profit margins are not as generous as they are in the parcel division. Parcels earned Business Post £15.6m operating profit in the year ending 31 March 2009, while UK Mail earned £11.6m.
Overall Business Post’s profits haven’t kept up with sales, and ultimately its the profits investors are interested in.
The recession must also be weighing on BPG’s share price. Although Chairman and co-founder Peter Kane says UK Mail is more insulated than we might expect because companies keep sending out statements, the amount of junk mail it carries might fall as businesses try to cut costs. The parcel service depends on the levels of business between companies, and Business Post reported 10% lower revenues in the second half of the year.
Nevertheless, on a long-term price earnings ratio of 13 it’s drifting towards bargain territory and an F_Score of nine out of nine, reflecting improving profitability, falling indebtedness and rising liquidity, shows that so-far Business Post is doing well despite recession. The launch last year of imail, which prints, addresses and posts mail for business customers shows its still innovating.
Perversely there’s not enough bad news stalking Business Post to make it attractive to a contrarian. With a market capitalisation of about £150m, it’s big enough to attract press comment, and City coverage. The Investors Chronicle likes Business Post, analysts like it, and the directors are upbeat too.
They’ve persistently bought on the dips, the latest being Guy Buswell, the chief executive who first joined the company back in 1989. He bought 15,000 shares at 285p earlier this month, taking his stake to over 127,000 shares.
The good vibes are almost enough to scare a contrarian off. But Business Post faces competition too, sometimes in slowly declining markets.
According to Postcomm, the industry regulator, there are now 25 licensed mail operators and the market for ‘transactional mail’ (bills and statements) is shrinking at a rate of 3% a year as companies and their customers switch to online billing.
The direct mail market has also shrunk since 2003, so, while the mail is opening up giving companies like UK Mail, DHL, Fed-Ex, TNT and others a new opportunity, the overall market, for mail at least, appears to be increasingly competitive and shrinking slowly.
This must have dampened the spirits of investors expecting a mail boom. The question is, are they too dismissive now? I think they underestimate Business Post, but I’d prefer to see the price even lower in relating to earnings, a long-term PE closer to 10, just to be sure.
