As industries go, logistics and delivery services are probably one of the safer bets for periods of economic turbulence. In the last year especially, the increase in home delivery and consequent business-to-business dealings has been a boon for many companies. Consumers now utilise the internet for as much as 26% of retail shopping, according to the Office for National Statistics.
Further to this, Royal Mail reported “overwhelming” demand for its parcel services last Christmas and business has continued to flourish for online food ordering app Deliveroo in 2021. So, taking all this into account, you’d be forgiven for assuming that logistics provider DX Group (LSE: DX) has had a stellar year. Well… not really. In its last annual report, DX reported a loss of £1.8 million on revenues of £329.3 million. Although, to its credit, it has reported a profit for H1 2021.
Since its IPO in 2014, the penny stock’s shares have plummeted by an eye-watering 75%. Despite this, DX has seen its share price rise by a similar percentage in the last 12 months, indicative of positive investor sentiment in the individual business.
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Turning the tables
DX has been in the process of turning around its fortunes since a new board and CEO were appointed in October 2017. After two disastrous years prior to this, there have been notable improvements in the business’ resilience and recent results have been encouraging, with a profit reported in each of the last two sets of interim results. DX is also expanding its network of depots, with two more planned for H2 of 2021, taking its total to almost 80 and consolidating its position as a leader in irregular dimension and weight (IDW) freight. This aggressive expansion has paid dividends, as the freight division saw its H1 revenues rise 19% year-on-year, which overshadowed a poorer performance by the business-to-customer division. Debt has also been reduced significantly, so much so that the company now has a positive net cash position.
What could go wrong?
DX is still significantly smaller than some of its rivals, such as Royal Mail, which disadvantages it in terms of economies of scale. This is especially pertinent now with the current HGV driver shortage and fuel prices pushing costs up for many businesses. If DX is unable to effectively pass costs on to consumers for the foreseeable future, then it will struggle to reach sustained profitability and growth. The recent weakness in its mail and courier division is also concerning, as prevailing market conditions are currently favourable.
Conclusion
There are many aspects of DX’s business that I like, including its ambitious expansion plans. However, it faces tough challenges from rising costs in the short term and additional Covid-related restrictions could further hamper its recovery. At the moment I am keeping this penny stock on my watchlist because it represents slightly too much risk for my liking. I’m happy to wait for its full year results on October 14th to make a more informed decision about the company’s potential.
