BUSINESS DIRECT GROUP (BDG)

Previous Stock Tip

These companies are all previous recommendations from the Red Hot Portfolio that I have subsequently recommended and then sold from the portfolio at a later date. By no means are these companies intended to be buy recommendations for you to go out and invest money towards their shares. For the opportunity to start making serious money from the recommendations I am making now, just start your no obligation trial!

BUSINESS DIRECT GROUP (BDG): Bad Signs - Oct 2007

RHPS Recommendation – SELL

Since I tipped the shares in April, the finance director has been replaced, City advisors have been changed and BDG has failed to deliver any encouraging news. This makes me uneasy. SELL.

BUSINESS DIRECT GROUP (BDG): Buy limit raised - Jul 2007

RHPS Recommendation – BUY

BDG can now deliver parts to any UK address, by 7am, from distribution centres based in mainland Europe. It has won two contracts worth £8m over the next five years, while it has also picked up new customers for Parcel Exchange. I have moved my buy limit up to 5p. BUY

BUSINESS DIRECT GROUP (BDG): Big Potential - May 2007

RHPS Recommendation – HOLD

Annual results from Business Direct have not added materially to the story I set out in the April issue. The most important point is that use of the ParcelXchange network of lockers increased from 39% to 51% last year, and the investment case rests upon this figure rising further. My Red Hot tip has drawn attention to the potential of this business, and the share price has leaped through my 4p buy limit. I don’t want to be too aggressive on this until we can see further evidence that things are moving in the right direction. So for now, HOLD.

BUSINESS DIRECT GROUP (BDG): The company that won’t be leaving the delivery to Postman Pat - Apr 2007

RHPS Recommendation – BUY

Manufacture something incredibly complex, like a computer, or a printer or a medical scanner, and these days you barely make a profit margin. This may not seem very fair, but for companies like Xerox, Fujitsu or Canon it is a fact of life. So in order to win the hearts and minds of their customers – and to make some money – they are putting the emphasis on service. One crucial aspect of service is delivery, and for critical items, necessary perhaps to keep a business running or an operating theatre open, delivery cannot be left to Postman Pat, or even to the 24-hour service of the courier companies.

If you need something badly, you don’t want to hang about waiting for it to be delivered. You want to pick it up from somewhere nearby at the start of the day. And this is precisely what Business Direct makes possible. It does not have a cavalry of daredevil motor bikers careering along our crowded roads. Instead, it has a network of boxes into which parcels can be dropped at night for collection first thing in the morning.

From 171 locations to 300

Here is how it works: Business Direct has installed lockers in 300 sites around the country, usually on the sites of supermarkets or petrol stations. They vary in size, but the standard is 4m x 2m, with 14 lockers in each stack. Items can be deposited at night and collected the following morning, typically by a service engineer. This sounds simple enough, but in fact it is complicated by the need to ensure that the process is secure, and that nothing can go missing.

Business Direct will pick up items from its customers on a regular basis each evening. They are then transferred, through the night, via the central warehouse in Rugby to the appropriate regional depot. From the regional depot they are then delivered to whichever lockers are closest to the address of the ultimate recipients. They are then ready for collection by 8.00am. Each parcel is barcoded by the sender, using equipment supplied by Business Direct; it is then scanned at each stage of its journey to ensure a complete record of its progress. The computer automatically sends a text message to the recipient when the parcel is ready for collection. The handover is electronically controlled. The lockers do not have keys. Instead, the appropriate locker automatically opens on reading the collector’s pin number and password. The recipient must scan each parcel to show that he has collected it, before his card is returned to him. The system also works in reverse. Customers who have received faulty goods can return them to the sender, and since they may become subject to an insurance claim, the ability to track their progress is crucial.

It took three years to perfect this system, now known as ParcelXchange, following which Business Direct was floated on AIM in 2004, at a share price of 50p. They soon doubled to over £1 – but today they trade at just 3.5p. What went wrong?

90% of the population within 5 miles

The main problem was that ParcelXchange did not have national coverage. At the time of its flotation it had 171 locations. But engineers and delivery men do not want to drive more than 15 minutes to make a pick-up, and that convenient proximity was only achieved last year when the network rose to 300 locations, meaning that there is at least one within five miles of 90% of the population. So the take-up of the service was slower than anticipated, but rather than concentrating on fixing this problem Business Direct shelled out for the acquisition of two companies – which seem to have made the financial situation worse rather than better.

Jewel in the crown

A loss of £500,000 in 2004 swelled to a £3m loss in 2005. Inevitably Business Direct was obliged to raise fresh capital at decreasing prices from ever more disillusioned shareholders, and then a series of management changes ushered in Paul Carvell, first as chairman and then as chief executive. I met him at the group’s headquarters in Rugby. With 30 years of experience in the logistics industry, including a very successful spell as chief executive of Business Post Group, Carvell knows that Business Direct has a unique proposition that is becoming of critical importance. With a good slug of shares and options – exercisable at a price of 3p – he has every incentive to succeed and knows that if he can turn the business around then it could become a very attractive takeover target for one of the big players in the logistics industry.

Last November Carvell announced the results of his strategic review, along with a £3m share placing to provide sufficient finance to develop the business. It is clear that ParcelXchange is the jewel in the crown. But thanks to those earlier acquisitions Business Direct has other activities. The first of these is Express. This is essentially a courier business, based in North London. However, rather than simply transporting documents and small packages, it delivers the likes of computer systems to office blocks – high value, bulky items which require two men in each van and sometimes special lifting gear. This business is subscale and has to subcontract a certain amount of its work. But after the recent appointment of new management, it is expected to make a decent return. The smallest division is headed “Technical”, and involves not only the delivery of items but also their installation. This could mean the repair of a printer in a bank branch, or some such straightforward tasks that customers such as Xerox, Siemens and Fujitsu are happy to subcontract.

Utilisation has now reached 50%

These smaller divisions do allow Business Direct to offer a broad range of services, and this flexibility has allowed it to secure new business. But the real potential for Business Direct lies with ParcelXchange, which delivers goods with a reliability that Carvell has not seen in his entire career in the industry. From a financial perspective the key is that this is a high fixed cost business. In other words, the lockers must be paid for and installed, and drivers must be employed whether they are busy or not. Customers pay a fixed weekly charge of around £40 for use of a locker, and will book them for long periods if they are regular users. At the start of 2006 capacity utilisation was 35%, but now it is 50%. What this means is that Business Direct is now receiving about £280 from each bank of lockers each week, as opposed to £200, and after fixed operating charges of about £110 per week the gross profit has risen from £90 to £170.

This is equivalent to £8,840 per year, rather than £4,680. If capacity utilisation is 65% the gross profit per annum becomes £13,000 and if Business Direct hits its ultimate target of 80%, then the gross profit would be £17,160. Multiply that by 300 locations, and you get a profit of £5.1m – not far short of Business Direct’s current market value.

ParcelXchange does have competitors, principally Bybox and Lynx. The former has 600 sites, but many of these are simply operated by lock and key without any tracking mechanism, while Lynx offers an “inboot” service (meaning goods are placed directly into the boot of the recipient’s car). So ParcelXchange has every chance of growing its UK business, while it is also starting to market the system which combines the lockers and the software overseas.

Huge opportunities

This is just one of the possibilities for expansion. Carvell has his eyes on others. He thinks that travelling salesmen, for instance in the pharmaceutical industry, could pick up samples from the lockers. He is also excited by an intriguing possibility with “absolutely phenomenal” potential. This is the use of the lockers not just for B2B (business to business) transactions, but also B2C (business to consumer). In other words, if you purchase something of value online – a mobile phone for instance – and you don’t want to have to wait at home for it to be delivered or drive miles to the DHL depot, you might elect to pick it up from the ParcelXchange next time you go to Tesco. This could dramatically increase the utilisation of the lockers – and have a major impact on Business Direct’s share price.

RHPS Verdict: With the post office finding it increasingly difficult to provide a local delivery service, and the courier services having their limitations, ParcelXchange can become crucial to product delivery – and therefore to customer satisfaction. The shares are a high risk recovery play, but we are getting in on the ground floor. BUY.

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The figures refer to the past and past performance is not a reliable indicator of future results. The past recommendation highlighted here is a small company share.By their nature, such investments can be relatively illiquid and, as a result, hard to trade. This makes such shares more risky than other investments. Please seek independent financial advice if necessary. These figures do not include the bid-offer spread, unless otherwise stated. Since the service began on 01/12/98 running through to 31/07/07, the average overall performance of the shares recommended is up 19.91%.All gains exclude dividend payments and dealing costs, unless otherwise stated. Profits from share dealing are a form of income and subject to taxation. Levels and bases of, and reliefs from, taxation are subject to change, and depend on individual circumstances. Full portfolio available on request. Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No. 115234.

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