ii view: Royal Mail cuts more jobs as part of transformation plan

Omicron has caused challenges, but the shares stand on a forecast yield of over 4%. Buy, sell or hold?

Third-quarter and transformation programme update

Chairman Keith Williams said:

"The past few months have demonstrated that the challenge for Royal Mail is to improve both quality and efficiency. Looking forwards, the delivery of our transformation and modernisation plans remain incredibly important in light of the fast-paced change we are seeing and ongoing inflationary pressures.”

ii round-up:

Postal operator Royal Mail (LSE:RMG) today underlined its determination to push its transformation programme as it announced the loss of around 700 managers at a cost of £70 million.  

Allowing for that one-off charge, it now expects the UK business to report an adjusted operating profit of £430 million in the year to March, down from a previous £500 million.

The restructuring is eventually expected to save around £40 million a year, with a saving of £30 million expected in the next financial year to the end of March 2023. 

Royal Mail Group shares rose by more than 4% in UK trading, having already gained by more than 200% since pandemic market lows in March 2020. The FTSE 100 index is up by around 47% in that time.

Royal Mail management highlighted confidence in a structural shift in parcel volumes since the start of the Covid crisis. Third-quarter domestic parcel revenue to the end of December was up by 44% compared to the pre-pandemic same quarter of 2019/2020. 

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The company, which operates both a UK and overseas business, has begun consultations with staff unions regarding the job losses. Some 15,000 staff were absent in early January due to the Omicron virus, causing delays to deliveries across the UK.   

Quarterly revenue for its overseas General Logistics Systems (GLS) business was up by just over a third in sterling terms compared to the same pre-pandemic third quarter period.

Full-year results to the end of March are scheduled for 19 May. 

ii view:

The group’s UK Parcels, International and Letters division (UKPIL) provides its core UK and international parcels and letters delivery businesses under the ‘Royal Mail’ and ‘Parcelforce Worldwide’ brands. Its international GLS business works overseas in around 40 countries including more than 30 in Europe, Canada and a selection of states in the USA.  

For investors, the operational impact from the pandemic cannot be ignored. Negotiations with staff unions can prove challenging, while inflationary cost pressures and increased customs processing following Brexit are also being discussed. Addressed letter volumes continue to decline, falling 17% in this latest quarter compared to the same pre-pandemic third quarter. 

That said, its quest for improved productivity is ongoing. Parcel volumes also continue above their pre-pandemic days, while shareholder returns remain a focus, with both a share buyback programme previously announced and the shares sat on an estimated forward yield of over 4%. In all, while bumps in the road are likely to continue, long-term positive momentum now arguably outweighs near-term headwinds, with income seekers likely to stay patient.  

Positives: 

• Exposure to online shopping trends
• Geographical diversity

Negatives:

• Inflationary costs pressures
• Falling letter volumes

The average rating of stock market analysts:

Buy