ii view: challenges on the increase at Royal Mail

It prospered in the post pandemic period, but headwinds have emerged. Buy, sell or hold?

Trading update for the five months to 31 August 2021

• Revenue up 8.2% year-on-year and by 17.7% versus 2019

ii round-up:

Royal Mail (LSE:RMG) operates in the UK and overseas. 

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 over 135,000 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 international business - General Logistics Systems (GLS) - works in around 40 countries, including more than 30 in Europe, Canada and a selection of states in the USA. It employs over 19,000 people. 

For a round-up of this latest update, please click here. 

ii view:

The structural decline in letter volumes and growing parcel volumes has proved the core theme to be addressed by management over recent years. A drive to improve productivity, often involving increased automation, has regularly left it in disagreement with staff unions. Its provision of the Universal Service Obligation has also left it in the political spotlight – a tough place from which to implement change.

For investors, the pandemic has accelerated change. Domestic parcel volumes are up around a third compared to the pre-pandemic period. Cost reductions, including those agreed with its staff and unions, continue to be implemented and a possible sale of its GLS business has previously been rumoured. 

But rising costs and potential staff shortages over its peak Christmas season should not be ignored. Neither should management caution regarding a further normalisation of its parcel performance as Covid unwinds. Staff calls for higher wages could now be seen, and challenges for its GLS business have risen given increased customs processing and reduced air freight capacity. For now, and while a forecast dividend yield of over 4.5% offers potential attraction for income seekers, reasons for caution have clearly increased. 

Positives: 

• Exposure to online shopping trends
• Geographical diversity

Negatives:

• Rising costs
• Letter volumes broadly declining

The average rating of stock market analysts:

Buy