ii view: Royal Mail owner swings into the red

Shares in this FTSE 250 company have halved during 2022. We assess prospects. 

First-half results to 25 September

• Revenue down 4% to £5.84 billion
• Operating loss of £163 million, down from a profit of £311 million
• No interim dividend
• Net debt of £1.47 billion, up from £540 million

Chairman Keith Williams said:

"The difference between the performances of our two companies could not be more stark. GLS has adapted well to inflationary pressures across its geographies. However, we have been standing at a crossroads with CWU in the UK for several months. We are now heading in a clear direction in light of the substantial losses in Royal Mail.

 "Whilst our frontline management population under Unite/CMA has agreed both pay and change in the last few months, progress on a deal for frontline employees has been blocked by the actions of CWU. Accordingly, we have started to implement the change needed to rightsize Royal Mail.”

 "The Board reiterates that in the event of the lack of significant operational change in Royal Mail it will look at all options to preserve value for the Group including the possibility of separation of the two businesses."

ii round-up:

International Distributions Services (LSE:IDS), known until recently as Royal Mail Group, today detailed an operating loss compared to a profit this time last year as it battled a slowing economy, a normalisation in parcel deliveries following the pandemic and staff industrial action. 

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Losses at its UK Royal Mail division more than offset a continued profit for its overseas business General Logistics Systems (GLS), with an overall group operating loss of £163 million contrasting with a profit £311 million for the first half of 2021. 

International Distribution shares rose by more than 1% in UK trading having already halved year-to-date coming into this latest announcement. Deutsche Post AG (XETRA:DPW) is down by close to a third during 2022, while the FTSE 250 index is down by a fifth.  

Revenue for its UK Royal Mail division fell by a tenth to £3.65 billion, with sales for the overseas GLS business rising by a similar amount to £2.2 billion. 

The FTSE 250 company continues to expect a full-year adjusted operating loss for the UK business of between £350 million and £450 million, with adjusted profit for GLS also maintained at between €370 million and €410 million (£322million to £366 million).

Management aims to return Royal Mail UK to an adjusted operating profit during the full year 2024 to 2025. 

Talks with the Communication Workers Union (CWU) continue, although management is already moving ahead with required changes. The board plans to cease talks if further staff industrial action goes ahead.

No interim dividend was declared, although consideration will be given to a final dividend from earnings generated by GLS. 

ii view:

The group’s UK letters and parcels business, including its Parcelforce brand, now sit within its Royal Mail division. 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.  

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For investors, the company’s desire to right size and improve productivity, and its continuing associated disagreements with staff unions, remains front and centre. Inflationary cost pressures such as a rising fuel bill and increased customs processing following Brexit continue to warrant consideration. As does the broad downward trajectory in addressed letter volumes and the now omitted interim dividend. 

More favourably, management’s push to increase efficiency at the UK Royal Mail business remains ongoing. Its overseas GLS business remains profitable, with potential for a separation of both businesses  still possible. In addition, consideration for a possible dividend alongside final results has also been flagged. 

On balance, and while some near-term caution looks sensible, an estimated consensus analyst fair price valuation of more than 290p per share, and there does appear grounds for optimism longer term. 

Positives: 

• Exposure to online shopping trends
• Geographical diversity

Negatives:

• Inflationary costs pressures
• Falling letter volumes

The average rating of stock market analysts:

Hold