ii view: Royal Mail raises overseas growth estimates

2020 proved a year to remember for this company’s investors, but what about 2021? Buy, sell or hold?

Full-year trading to 31 March and General Logistics Systems (GLS) division update

• Still expects group adjusted operating profit of around £700 million
• Declared a one-off final dividend of 10p per share
• GLS division adjusted operating profit is expected to be around £350 million

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 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 40 countries including 36 in Europe, Canada and a selection of states in the USA. It employs around 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 being addressed by management over recent years. A drive to improve productivity at the company, 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.

But the pandemic and renewed management appears to have brought the need for change into ever sharper focus. Parcel revenues exceeded letter revenues for the first time in the first half to late September. Now, this latest update has seen growth prospects for its GLS division being raised. Expected revenue growth in the region of 12% for GLS compares to analysts’ forecasts of under 10%. The payment of a final dividend contrasts with management’s earlier projections for no dividend payments over the 2020/2021 financial year. 

For investors, the potential for some slowing in parcel demand post the pandemic, as consumers return to the shops, needs to be considered. So, too, does ongoing competition and the group’s still often difficult relationship with staff unions. 

That said, a pending updated dividend policy will add clarification to its shareholder returns going forward. Added growth for its GLS business also increases management’s potential flexibility with the business. Arguably, this makes a possible sale easier. And a forecast price/earnings ratio now below the three-year average could offer scope for further share price upside. In all, while room for caution persists, change momentum could finally have been set rolling.  

Positives: 

• Exposure to online shopping trends
• Geographical diversity

Negatives:

• Letter volumes broadly declining
• Active staff unions

The average rating of stock market analysts:

Strong buy