Letter from Gatemore Capital Management LLP to DX Group plc

Published: Nov. 29, 2021 at 1:00 AM CST

LONDON, Nov. 29, 2021 /PRNewswire/ --

29 November 2021

Board of Directors
DX (Group) plc
Ditton Park
Riding Court Road
Datchet
Slough SL3 9LL

Dear Members of the Board:

As you are aware, Gatemore Capital Management LLP ("Gatemore" or "we") manages the Gatemore Special Opportunities Fund, which as of today, has an economic interest of approximately 20.5% in DX (Group) plc ("DX" or the "Company").

Since 2017, we have been amongst DX's most enthusiastic shareholders and continue to be a committed long-term investor. We view the business as a standout performer in its field but have been deeply disappointed by the Board's recent failures, culminating in the Company's announcement on 25 November 2021 which saw the share price plummet roughly 25% on the day.

We question why the content of that announcement was so ambiguous and lacking in any meaningful detail, in particular regarding the nature of the internal investigation and the reasons why the related internal inquiry and audit cannot be finalised ahead of 2 January 2022 so as to avoid a suspension from trading of the Company's shares. This lack of transparency is entirely unacceptable.

Today, we respectfully request that Liad Meidar, Managing Partner of Gatemore Capital Management, be appointed immediately to the DX Board in order to better understand the underlying issues, promote improved governance standards and investor communications, and seek ways to achieve full value for shareholders, including through exploring strategic alternatives.

Strong Operational Performance

We continue to be very pleased with the Company's operational performance. During FY21, DX upgraded its profit forecast no less than five times. The Company has successfully returned to profitability and is expected to generate c.£50m of cumulative free cash flow over the next three years (FY22-FY24)[1]. DX has a very strong balance sheet with a net cash position, no pension liability, and freehold ownership of its Willenhall hub, an asset we estimate to be worth £20-25m[2]. DX is the leader in service quality and has leading market share in the UK in IDW (irregular dimension and weight) freight, a segment which the Company estimates is growing at 10% per year[3].

DX annual free cash flow
DX annual free cash flow

Infographic [4]  - https://mma.prnewswire.com/media/1697429/Figure_1_Infographic.jpg

This impressive operational performance is due to the tireless work of DX's CEO Lloyd Dunn and his excellent senior management team, including CFO David Mulligan, Managing Director of DX Freight Paul Ibbetson and Managing Director of DX Express Martin Illidge, as well as a strong team beneath them.

Dislocated Value

Despite the Company's successful operational turnaround, positive financial outlook and growing cash generation, DX's share price is down 36% year-to-date while its core peers are up 10 – 50%[5].

This is despite the market expecting DX to deliver the highest earnings growth in the sector over the next three years, as well the highest cash flow yield, while trading on a very low P/E ratio relative to its earnings growth. In spite of its continued strong operational performance, the Company has not come close to reaching analyst target prices of 45p, 55p and 57p (prior to DX's 25 November 2021 announcement), representing 100-150% upside from the closing price of 22.5p on 26 November 2021. The Company has assured investors that its 25 November 2021 announcement is a governance matter, not a financial one and therefore does not change its financial guidance or the outlook for the business.

DX peer comparison
DX peer comparison

Infographic - https://mma.prnewswire.com/media/1697430/Figure_2_Infographic.jpg

Governance Issues

We believe there are two main reasons for this dislocation. One is the Board's continued mismanagement across multiple areas, including corporate messaging and transparency, audit process, broker engagement, and the lack of return of capital to shareholders. The second is the clear missteps by Grant Thornton, DX's new auditor, in the FY21 audit process.  Originally scheduled for release in September, DX's FY21 results were postponed first to October and then November.  This not only alarmed investors, it left the Company and Grant Thornton with insufficient time to resolve any open issues, such as the internal investigation and inquiry, ahead of last week's scheduled Annual General Meeting.

The Board has a poor record on investor communications and transparency. This sunk to a new low with last Thursday's baffling announcement which outlined further potential delays in the confirmation of the FY21 accounts and raised the spectre of a trading suspension on 4 January 2022. Given the seriousness of such an outcome, we find it extraordinary that the Board failed to provide any further detail or clear explanation as to the nature of the internal investigation and inquiry or why these cannot be completed in time to avoid a suspension. It is our opinion that the nature of this announcement demonstrates a complete failure of the Board to act in accordance with its fiduciary duties and an absence of acceptable governance standards at DX.

A New Way Forward

We have repeatedly engaged with the Board in private over these governance and communications issues during the past year. Nonetheless, we continue to be surprised and disappointed by its inaction around the issues highlighted above and find ourselves stunned by the gross mismanagement and ambiguity of last week's announcement.

We believe the Board is in need of change. As the Company's largest investor, holding over 20% of its issued share capital, we respectfully request that the Board exercises its powers immediately to appoint Liad Meidar, Managing Partner of Gatemore Capital Management, to the Board.

As a director of the Company, Mr. Meidar will pursue the following priorities:

1.  promote significantly improved and proper governance standards;

2.  push for the resolution of any material issues identified by the internal investigation, the internal inquiry, or Grant Thornton, in each case with the necessary degree of urgency;

3.  meaningfully improve DX's investor communications and transparency; and

4.  seek ways to achieve full value for all shareholders, including through exploring strategic alternatives.

The operational turnaround of DX has been a remarkable success, but the Board must now adopt a much more thoughtful approach to corporate governance, transparency and its fiduciary duties in order to achieve the high standards expected by its shareholders.

We believe the overwhelming majority of our fellow shareholders will agree with us, and, in the interests of resolving the Company's governance challenges in a timely and cost-efficient manner, we ask that the Board confirm acceptance of our proposal as soon as possible, and no later than the close of business Friday 3 December. Failure to do so will force us to consider the expensive, inefficient, distracting and, most critically, insufficiently urgent path of requisitioning a shareholder meeting.

Conclusion

Gatemore remains a committed long-term investor in the Company. We believe strong governance and transparency are key to achieving full value for shareholders, and we are determined to ensure this outcome for DX.

Thank you for your attention, and we look forward to a prompt response.

Sincerely

Gatemore Capital Management  LLP

For media enquiries:
Greenbrook
Rob White, Teresa Berezowski
Email: gatemore@greenbrookpr.com 
Tel: +44 (0) 20 7952-2000

Disclaimer

Gatemore Capital Management LLP ("Gatemore") is authorised and regulated by the Financial Conduct Authority. Registered No. OC346366. Registered Office: 33 Cavendish Square, London W1G 0PW, United Kingdom.

The information contained in this letter is not intended to constitute, and should not be construed as, investment advice. This letter contains certain forward-looking statements and information that are based on Gatemore's beliefs, as well as assumptions made by, and information currently available to Gatemore. These statements include, but are not limited to, statements about strategies, plans, objectives, expectations, intentions, expenditures and assumptions and other statements that are not historical facts. When used herein, words such as "anticipate," "believe," "estimate," "expect," "intend," "plan" and "project" and similar expressions (or their negative) are intended to identify forward-looking statements. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability whatsoever (for negligence or misrepresentation or in tort or under contract or otherwise) is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice and Gatemore does not undertake to update or supplement any of the information, analysis or opinion contained herein. Nothing in this letter should be relied upon as a promise or representation as to the future. Nothing in this letter should be considered as a profit forecast.

This letter is not intended to be and does not constitute or contain any investment recommendation as defined by Regulation (EU) No 596/2014 (as it forms part of the domestic law in the United Kingdom by virtue of the European Union (Withdrawal) Act 2018). This is not an official confirmation of terms and is not a recommendation, offer or solicitation to buy or sell or take any action in relation to any investment mentioned herein. Any prices, quotations, historical financial information, past performance or forecasts contained herein are indicative only and not guaranteed in the future. To the best of Gatemore's ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources that Gatemore believes to be accurate and reliable. However, such information is presented "as is", without warranty of any kind, whether express or implied, and Gatemore has not independently verified the data contained therein. Any person who is in any doubt about the matters to which this letter relates should consult an authorised financial adviser or other person authorised under the UK Financial Services and Markets Act 2000.

[1] Source: broker consensus estimates.

[2] Based on comparable sale and leaseback transactions.

[3] Source: DX FY21 results presentation.

[4] Source: broker consensus estimates and S&P Capital IQ as at 26-Nov-21.  Note: EV on IAS17 basis.

[5] Source: S&P Capital IQ. Core peers include Royal Mail Group, Wincanton and Clipper Logistics

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