ii view: Royal Mail shares plunge to 18-month low

Targeted change at the company is taking time but there remains a focus on shareholder returns. We assess prospects. 

Full-year results to 27 March

• Revenue up 0.6% to £12.71 billion
• Adjusted operating profit up 8% to £758 million
• Final dividend of 13.3p per share
• Total full year ordinary dividend of 20p per share  
• Net debt up 115% to £985 million

Chairman Keith Williams said:

“Whilst a difficult environment persisted over the last year, with operational challenges caused by Omicron and tight labour markets, we continued to see financial tailwinds from the pandemic, which are now dissipating. We also have clear headwinds as we enter 2022-23. Whilst both GLS and Royal Mail face short term challenges, they also have longer term opportunities.”

ii round-up:

Postal operator Royal Mail (LSE:RMG) today reported a rise in profit but offered caution for the outlook given weakening economic growth and growing inflationary pressures.

Adjusted operating profit rose 8% to £758 million in the year to late March, falling short of City expectations, with cost savings of £59 million at the low end of management’s previous forecast range of £55 million to £80 million. 

Royal Mail Group shares fell by more than 12% in UK trading having already fallen by around a third year-to-date coming into these latest results. Shares for Deutsche Post AG (XETRA:DPW) are down by a similar amount during 2022. The FTSE All World index is down almost 18%. 

• Inflation watch: cost of living up 9% at 40-year high
• Insider: directors and analysts both buyers of these shares at multi-year low
• Recessions are becoming more likely – here’s how to invest

Management says the business could meet current analyst consensus forecast of £303 million of adjusted operating profit for its UK Royal Mail business over the year ahead, but with downside risk. It also assumes that it could reach a deal with unions on pay and without material industrial action.

The UK Royal Mail division achieved a near 21% increase in adjusted operating profit to £416 million over this latest year. Domestic parcel volumes rose by almost a third versus the pre-pandemic period. 

Profit on the same basis for its overseas GLS business fell 4.5% to £342 million, with good progress in France and Canada offset by profit margin pressure in the US. 

A final dividend of 13.3p per share declared adds to both an ordinary interim of 6.7p and a special dividend of 20p previously paid. That compares to a total of 10p per share for the year before. 

A first quarter AGM trading update is likely to be announced in July. 

ii view:

The core UK Parcels, International and Letters (UKPIL) division falls under the ‘Royal Mail’ and ‘Parcelforce Worldwide’ brands. 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.  

For investors, the pace of transformation and level of cost savings achieved over this latest year looks disappointing. A challenging relationship with staff unions persists, while inflationary cost pressures such as rising fuel and increased customs processing following Brexit are now being battled. Addressed letter volumes also remain on a downward trajectory, falling by nearly a fifth compared to pre-pandemic levels. 

On the upside, its quest for improved efficiency is ongoing, with management committed to pushing its transformation programme harder. Additional Covid costs are yet to be fully removed while parcel volumes continue above their pre-pandemic days under increased e-commerce shopping. Potential for a separating out of the overseas GLS business also warrants consideration. On balance, and with the shares now sat on a historic and estimated future dividend yield of around 6%, investors are being paid to wait for required change at the postal giant.   

Positives: 

• Exposure to online shopping trends
• Geographical diversity

Negatives:

• Inflationary costs pressures
• Falling letter volumes

The average rating of stock market analysts:

Buy