DX – the fragrant smell of profits to come

DX has been undergoing a big turnaround operation since 2018 and I can now see the fruits beginning to show through, writes Mark Watson-Mitchell. 

Catching companies as they are turning around from losses into profits is an important element when selecting stocks for growth portfolios.

And that is just what appeals to me about DX (LON:DX.). It has been undergoing a big turnaround operation since 2018 and I can now see the fruits beginning to show through.

This £72m capitalised company has a £330m turnover for its various activities in the freight market.

It provides parcel freight, mail, secure, courier and logistic services in both the UK and in Ireland and employs some 3,500 people.

The company was established way back in 1975 as the Document Exchange, handling documents specifically for the legal sector.  Over the years it has expanded its services and today is a leading independent operator for both public and private sector organisations.

DX provides a wide range of next-day or scheduled delivery services to both business and residential addresses nationwide for parcels, mail and high-value deliveries like jewellery, optical lenses, pharmacy items and high street fashion.

Items that the company transports ranges from confidential documents and valuable packages to large ‘ugly’ awkward-to-handle freight which is unsuitable for standard conveyors.

There are 573.68m shares in issue. Large holders include Gatemore Capital (35.6%), Hargreave Hale (19.0%), Lloyd Dunn, the CEO (10.7%), FIL Investments (6.16%), Ruffer (5.23%), River & Mercantile (4.0%), Hargreaves Lansdown (3.48%), Downing (2.59%), AXA Investments (2.33%), and Unicorn (2.27%).

The years of high revenue but at poor operating margins are, hopefully, over.

In 2017 on £292m of sales it lost a staggering £82.3m, the next year it did £299m and lost just £19.9m.

For the year to end-June 2019 the group turned over £322.5m and recorded a pre-tax loss of just £1.7m.

The recent first-half trading update gives strong clues that better times are ahead.

For the six months to end-December 2019, its results are expected to show a significant improvement over the same period last year. The company’s performance has been benefiting from several new business wins, from operational improvements and from offering much better levels of customer service.

The first-half figures are due in early March when we will get an update on current-year progress.

Its broker finnCap estimates £331.5m in sales this year to end-June, with pre-tax profits coming in at around £4.5m, worth 0.7p per share in earnings.

For next year some £338.3m of revenue could push profits up to £7.5m, worth 1.2p in earnings per share.

The we should see a leap in turnover for the 2022 year to £56.7m, with £11.2m of profits, 1.8p in earnings and even a 0.3p per share dividend.

The shares trading at around the 12.5p level are on a very appealing rating of 17.8 times current year earnings, then 10.4 times next year and a mere 6.9 times prospective.

I now fix an end-2020 target price of 15.5p.