ii view: Royal Mail owner IDS suffers huge losses

First-half results to 24 September

• Overall group revenue up 0.4% to £5.86 billion
• UK Royal Mail adjusted operating loss of £319 million, up from a H1 loss of £219 million last year
• Overseas or General Logistics Systems (GLS) adjusted profit down 7% to £150 million
• Overall group adjusted operating loss of £169 million, up from a H1 loss last year of £57 million
• Net debt up 4% to £1.53 billion
• No dividend payment

Guidance:

• Expects the group overall for the full year to about breakeven on an adjusted operating performance excluding staff redundancy costs

ii round-up:

UK Royal Mail owner International Distributions Services (LSE:IDS) today detailed increased half-year losses as the weak economic backdrop hindered parcel volumes and corporate customers failed to return following previous staff strikes.

A 6% decline in domestic parcel demand helped push the company's UK Royal Mail division to a £319 million interim loss compared to last year’s £219 million deficit. The newly appointed chief executive Martin Seidenberg flagged his hopes for the overall group to break even on an adjusted basis come its May 2024 full year results, but stressed an urgent requirement for change in its government backed Universal Service Obligation.

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Shares in the FTSE 250 company fell more than 2% in UK trading having come into this latest news little changed over the last year. That’s similar to the UK focused FTSE 250 index itself, although in contrast to a 50% gain for US listed FedEx Corp (NYSE:FDX). 

UK Royal Mail is the country's sole designated Universal Service Provider, forcing it to provide a ‘one-price-goes-anywhere’ service on a range of letters and parcels. Its relatively new CEO flagged a requirement to maintain a network built for 20 billion letters when it's only now delivering seven billion. 

Addressed letters during this latest half-year to late September fell 9% year-over-year to 3.26 billion. UK parcel volumes came in at 508 million, down from 539 million in H1 last year.  

Volumes at its overseas focused General Logistics Systems (GLS) division climbed 6% during the half to 433 million, helping it  generate an adjusted interim profit of £150 million, although down from £162 million a year ago.  That partly countered losses at Royal Mail, taking the group’s overall adjusted loss for the first half to £169 million. 

Management again declared no dividend, but expressed its hopes for a small dividend come the full-year results and generated by its GLS division only. 

A third-quarter trading update will likely be announced late January. 

ii view:

International Distributions Services operates via both a UK and overseas business. The UK Royal Mail division delivers letters as well as packages under its Parcelforce brand. The 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, losses at its Royal Mail business continue to dominate overall group performance. Management’s desire to reform its Universal Service Obligation with the government cannot be forgotten, a push to right size and improve productivity at Royal Mail is still largely to be executed, while costs generally for businesses remain elevated. 

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On the upside, the relatively recent appointment of Martin Seidenberg, a former Deutsche Post executive, will hopefully inject renewed vigour and direction into group strategy. A long-awaited deal with the Communication Workers Union hopefully opens the door to increase productivity. Costs such as fuel may now have peaked, while shareholders will welcome a return to the dividend list.  

There is clearly much work to be done to improve the company's health, but a new chief executive and previous settlement with unions at least solve two issues that had been overhanging the business. 

Positives: 

• Exposure to online shopping trends
• Geographical diversity

Negatives:

• Elevated costs
• Falling letter volumes

The average rating of stock market analysts:

Hold