ii view: Royal Mail investors continue to see red

A near 70% share price fall over the last five years sees new leadership promising yet more change.

Full-year results to 29 March 2020

• Revenue up 3.8% to £10.8 billion
• Pre-tax profit down 31% to £275 million
• Net debt up 277% to £1.13 billion 
• No final dividend payment

Guidance: 

• Expect UK Parcels, International and Letters business (UKPIL) to be materially loss making
• Profit from General Logistics Systems (GLS) may well fall
• Not paying any dividend this year (2020-21)
• Intend to re-start dividends in 2021-22

Interim executive chair Keith Williams said:

"In recent years, our UK business has not adapted quickly enough to the changes in our marketplace of more parcels and fewer letters. Covid-19 has accelerated those trends, presenting additional challenges.

"We are implementing a three-step plan. Firstly, we're taking immediate action on costs. Secondly, we're accelerating the pace of operational change in the UK to address long-standing challenges and be sustainable for the long term. Thirdly, we're working with all stakeholders to underpin the Universal Service Obligation to ensure it reflects user needs and is modern, contemporary and sustainable. 

"At GLS, we are capitalising on growth opportunities in parcels, protecting margin in the short term with opportunities for margin expansion in the future. At the same time, we are seeking to improve performance in key markets. We will focus investment on growing markets and improve cashflow.

"Royal Mail and GLS are different businesses, with different strategies. At Royal Mail, our focus is on a step change in transformation; at GLS we aim to continue to grow."

ii round-up:

Royal Mail (LSE:RMG) operates through a UK and an overseas business. 

Its 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. It employs just over 140,000 staff. 

As the UK’s sole designated Universal Service Provider, it provides a ‘one-price-goes-anywhere’ service on a range of letters and parcels to over 30 million addresses across the UK, six-days-a-week.

Its overseas or General Logistics Systems (GLS) division, works overseas in 44 countries including Europe, Canada and a selection of states in the USA. It employs around 19,000 people. 

For a round-up of these full-year results, please click here. 

ii view:

Royal Mail some years ago highlighted research findings pointing to a 26% fall in the number of UK domestic letters over the next five years. It then launched a recovery plan largely targeting improved productivity. But the plan, and adopting significant automation, left the company crossing swords with staff unions. 

Now, Covid-19 has further magnified its problems, resulting in another change of leadership and another strategy to try and place it on a firmer footing. Profit after tax from continuing operations has declined for the last three years, and the share price is down by nearly 70% over the last five years.

For investors, a new strategy to focus on the growth of parcels offers hope that management is finally grasping the nettle. But actions on costs and operational change will likely continue to involve staff and further potential conflict with unions. The group’s provision of the Universal Service Obligation also leaves it in the political spotlight – a tough place from which to implement change. Finally, the suspension of the dividend payment removes a major shareholder attraction. For now, while Royal Mail’s exposure to online shopping trends is not to be forgotten, the mountain for management to climb remains incredibly steep.

Positives: 

• Exposure to online shopping trends
• Geographical diversity

Negatives:

• Demand for letters continues to fall
• Dividend payment suspended

The average rating of stock market analysts:

Sell