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The Investment Column : Nightfreight is short on volume

Nightfreight recently bought a rival distributor called Pacemaker, so it was appropriate that the express parcels and freight forwarding group should give investors a minor heart murmur yesterday by delivering lower-than-expected profits. The shares fell 14.5p to 58p, compared to their 1994 flotation price of 105p, on news of an 8 per cent rise in pre- tax profits to pounds 5.01m on sales 42 per cent higher at pounds 81.2m in the year to November 1996.

Worse, earnings per share dipped slightly to 6.7p from 6.8p while the final dividend was held for a total payout of 3.55p (3.38p).

The company warned that volumes in the core parcels business were about three points below expectations. Bad weather and what Peter Johnson, the chairman, called "the recent downturn in manufacturing output" were blamed. Nor has Nightfreight, with 46 depots, been able to pass on higher fuel costs to customers.

But Nightfreight's problems go back to the loss of a lucrative three- year newspaper distribution contract with the Independent and the Independent on Sunday. Although other contract publishing deals have been struck, notably with WH Smith, Nightfreight admits it has been unable to make up the shortfall in both volumes and margins.

To make up for the lack of critical mass in contract publishing, Nightfreight is looking at a sizeable acquisition, though the balance sheet is already looking stretched, with gearing set to stay at over 90 per cent this year.

At least Nightfreight's recent acquisitions are bedding down well - so well that the earn-out deal for freight forwarder Hay Pollock is being renegotiated due to a conflict of interest arising from Ron Sullivan, the principal vendor, also sitting on Nightfreight's board.

Brokers think Nightfreight will do well to make pounds 5.7m this year, implying a forward p/e ratio of just seven. The group's lack of focus suggests only limited upside.