ii view: Royal Mail CEO's exit triggers share price rally

A new leader and a promised accelerated pace of change, but can Royal Mail really deliver?

Covid-19 trading update and director change

• Rico Back stepping down as chief executive
• UK business costs up by £40 million
• 308 million fewer addressed letters
• 36 million more parcels

Interim executive chair Keith Williams said:

"Rico Back has made a significant contribution to the evolution of our business over his 20 years with us, particularly in building our international parcels business and developing our group strategy, which recognised the urgent need for change to create a sustainable business for the future. On behalf of the board, I would like to extend my thanks to Rico and wish him well in the future. "  

ii round-up:

After just under two years in charge, Royal Mail's (LSE:RMG) chief executive Rico Back is stepping down, with further changes to the UK business due to be announced alongside full year results on 25 June. 

Back had previously announced a £1.8 billion transformation investment plan to 2024, aimed at improving productivity and subsequent profitability. Less than one third of its UK parcels have been machine sorted.

But the plan has brought the company into conflict with staff unions. Royal Mail employs over 140,000 people in the UK and another 19,000 across its overseas parcels business or General Logistics Systems (GLS).  

Chairman Keith Williams has been appointed as interim executive chair. Given his business transformation and industrial relations experience at British Airways and John Lewis, he will now lead talks with stakeholders regarding an accelerated pace of change across the company. 

A search for a permanent CEO of its UK Parcels, International and Letters business (UKPIL) is now under way. 

Royal Mail shares rose by more than 5% in early UK trading having fallen by more than 20% in 2020 and by 17% in 2019. Deutsche Post (XETRA:DPW) shares in contrast, although down by a similar amount in 2020, rose by more than 40% in 2019. 

Directors will not be receiving any bonuses for the financial year just gone. Frontline staff will receive payments of up to £200 each or £25 million in total for recognition of their role during the corona crisis.  

Trading over April has seen a substantial switch from letters to parcels. Costs for its UK business have risen by £40 million given overtime to cover Covid-19 absenteeism, social distancing measures and required personal protective equipment. 

Royal Mail previously cancelled its 2019/2020 final dividend payment under measures to conserve cash during the Covid crisis. 

ii view:

Research suggesting that the number of UK domestic letters would decline by around 26% over the next five years underpinned the now departing chief executive’s UK 'turnaround and grow' plan. But battles with staff unions sent the plan off course. 

For 2020, and considering added Covid-19 challenges hindering the turnaround programme, the core UK business (UKPIL) is likely to be materially loss making, with profits at GLS significantly reduced. 

For investors, a battle with unions to execute productivity gains has now been joined by a fight against coronavirus. While new management and plans to accelerate change are now being promised, the cancellation of the final 2019/20 dividend payment removes what is arguably the key attraction. For now, while Royal Mail’s exposure to online shopping trends is not to be forgotten, the mountain for management - new and old - to climb is incredibly steep. 

Positives: 

• Exposure to online shopping trends
• Geographical diversity

Negatives:

• Long-term demand for letters is expected to fall
• Ongoing dispute with staff unions

The average rating of stock market analysts:

Sell