Connect Group – the Tuffnells business

n 2014 the big idea at Connect Group (LSE:CNCT) was to diversify into parcel delivery and at the same time gain synergy with the early morning News Distribution business by buying Tuffnells for £121m. Here are the performance numbers for Tuffnells under Connect’s ownership – not pretty reading for shareholders who forked out £121m.
£m 2019 2018 2017 2016 Less than year to August 2015
Revenue 165 175 183 174 114
Adjusted operating profit -14.1 -5.0 12.0 15.0 9.7
Exceptional items – write-offs -53.5 -52.7 -7.7 -8.9 -4.6
Statutory operating profit -67.6 -57.7 4.3 6.1 5.1
Assets n/a 109 167 176 177
Liabilities n/a -35 -36 -49 -41
Depreciation and amortisation -10.9 -57.7 -11.2 -10.4 -6.5
Additions to non-current assets 4.8 4.4 6.7 11.1  Perhaps we should be grateful turnover did not decline much, indicating that there are thousands of customers still coming to Tuffnells despite hiccups in customer service.
Having said that, Gary Kennedy mentioned, at a November analyst’s briefing that Tuffnells’ “volumes continue to be soft” and “unfortunately in that business we are not at the point we expected to be.  But I have no doubt we have the resolve to get there….We’ve fallen short – competitors are picking up customers. It’s a highly competitive market. Brexit doesn’t help.” Not exactly brimming with confidence, is he?
There wasn’t any good news to report at January’s AGM other than Gary Kennedy, Chairman, saying that Michael Holt, who had recently been put in charge of Tuffnells, was doing “a sterling job”.


The Tuffnells turnaround plan
The directors have pointed to the following actions,

• Cost base to be cut by £10m pa
• Alter the proportions of fixed to variable costs – more on variable, e.g. reduce trunking truck numbers
• Improve customer satisfaction ratings. Make sure employees understand and address consistent service standards
• Revenue per consignment increases – dynamic pricing, moving unprofitable customers off the list
• Higher consignment volumes and new customer wins
• Network optimisation and improved last-mile routing
• Caution on capex spending at Tuffnells

Whether or not this plan fails, Tuffnells was on the market to be sold: “is Connect Group the right home for Tuffnells?” (Chairman Gary Kennedy, at the analyst’s briefing). But Covid-19 has probably eliminated any interest from buyers.
Some scenarios

1. Sunny uplands

The directors get a grip quickly, winning over Tuffnells’ employees, nurturing a new culture and then regaining customers while keeping costs down.  Profits appear.
I’m hopeful that the increased national demand for parcel delivery has greatly increased the chances of Tuffnells being profitable this year and next.
If Tuffnells just breaks-even Connect Group makes about £23.7m pa after tax from Smiths News (perhaps declining by 4% pa in future).
Company intrinsic value is then over five times its current market price.2.
2. Sell it
An industry buyer is found to
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