ii view: Royal Mail is reinventing itself

Inflationary pressures sit against a forecast dividend yield of over 4%. Buy, sell, or hold?

First-half results to 26 September

• Revenue up 7.1% to £6.07 billion
• Adjusted operating profit of £404 million from £37 million
• Pre-tax profit of £315 million from a loss of £17 million
• Net debt down 46% to £546 million
• Interim dividend of 6.7p per share (last year: nil)
• £200 million special dividend
• Commencing a £200 million share buyback

Royal Mail chief executive Simon Thompson said:

"Re-invention of Royal Mail is inflight; we are making pleasing progress with our change agenda. We're seeing the benefits of our programmes to reduce costs, and are developing our plans to address inflationary pressures which will impact next year and beyond. We're also taking steps to equalise performance across our whole operation to ensure that our customers always get the great levels of service they expect from Royal Mail.”

ii round-up:

Royal Mail (LSE:RMG) operates via both a UK and 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 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, or General Logistics Systems (GLS) business works overseas 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 these latest results, 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.

For investors, inflationary pressures and increased customs processing need to be remembered. So do tough comparatives for Royal Mail ahead and a revising down of hoped-for cost savings this year to £80 million from £100 million previously.  

On the upside, revenue gains of 6.4% and 7.5% for Royal Mail and GLS respectively point to ongoing trading momentum. Both a £200 million share buyback programme and £200 million special dividend also arguably suggest management confidence in the outlook, while a forecast dividend yield of over 4% is hard to ignore in the ongoing ultra-low interest rate environment. For now, and with accelerated change during the pandemic pitched against increased near-term headwinds, the shares may consolidate gains of more than 60% over the last year.   

Positives: 

• Exposure to online shopping trends
• Geographical diversity

Negatives:

• Lowered Royal Mail cost savings target
• Letter volumes down 19% compared to two years ago

The average rating of stock market analysts:

Buy