Interactive Investor

ii view: why Royal Mail is booming

11th February 2021 11:32

Keith Bowman from interactive investor

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A recent union agreement and the construction of a new parcel hub offer positives. Buy, sell or hold?

Third-quarter results to 31 December

Interim Executive Chair Keith Williams said:

"Our colleagues have worked incredibly hard to deliver these exceptional volumes at a time when many units have experienced rising levels of Covid-19 related absences, including necessary self-isolation.  I want to thank them for their extraordinary dedication.

"At Royal Mail our busiest day during the quarter saw 32% more parcels delivered than our busiest day during the first national lockdown in 2020. Given these record volumes, we recognise that at times our service during the period was not always as we would have wished. But thanks to the efforts of our team, the retention of around 10,000 of the 33,000 flexible workers from the Christmas peak, and the introduction of new processes, we have been making encouraging progress. We are resolutely focused on delivering a comprehensive service despite the challenging circumstances."

ii round-up:

Royal Mail (LSE:RMG) today pushed higher its estimate for current full-year profit as it handled record parcel volumes under the pandemic as consumers continued to shop from home. 

A total of 496 million parcels were handled during the quarter, with parcel revenues up 43% compared to the final quarter of 2019 and overall group revenue up 20% for three-month period to £3.64 billion. Adjusted full-year profit is now expected to comfortably exceed £500 million, up from last year’s £325 million and above current City forecasts nearer to £400 million. 

Royal Mail shares rose by more than 8% in UK trading, leaving them up by more than 200% since pandemic induced March lows. Shares of online retailing giant Amazon (NASDAQ:AMZN) are up by more than 70% over the same time frame while shares of home food delivery group Ocado (LSE:OCDO) have doubled.  

January remained robust, with UK parcel volume growth of 37%, fuelled by the re-introduction of nationwide Covid restrictions and a peak in the volume of items being returned to retailers following the festive season.

Business for its overseas parcel division General Logistics Systems (GLS) also proved robust. Quarterly revenue grew by 29.4%, aided by growth in B2C and international volumes, including increased volume because of new lockdown restrictions. Active in over 40 countries, GLS’s main focus is Spain, France and the US.

Letter volumes for its core UK business retreated by 14% year-over-year in the quarter, helped by a more robust December performance. But volumes fell by 24% in January, hindered by the reintroduction of pandemic lockdowns. Annual price increases were also made in January.

Earlier in the year, and given rising Covid related costs, the group suspended its dividend payment, with plans to restart payments pinned on the next 2021/2022 financial year. 

Full-year results are currently scheduled for 20 May. 

ii view:

The ongoing structural decline in letter volumes and growing parcel volumes remain the core themes being addressed by management. Construction of its largest and second parcel hub is now underway in the Midlands, with automated systems being installed able to process over one million parcels per day.

But the drive to improve productivity, often involving increased automation, has regularly left it crossing swords with staff unions. Intense competition, and the distraction away from its core UK business, has also left management considering prospects and strategy for its GLS business. An update is expected with the next results. 

For investors, the company’s failure to improve productivity in unison with its staff and unions has arguably coloured the backdrop for too long. Its provision of the Universal Service Obligation also leaves it in the political spotlight – a tough place from which to implement change – while the suspension of the dividend removes a key former shareholder attraction. 

That said, the pandemic 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, and some recent agreement with its staff unions has been reached. Expanding profits also make a hoped-for reintroduction of the dividend in the next financial year increasingly possible. In all, and while any return to more normal post-pandemic life could see some current strength lost, positive change momentum now established at Royal Mail could further accelerate to the benefit of shareholders over the long-term. 

Positives: 

  • Exposure to online shopping trends
  • Geographical diversity

Negatives:

  • Demand for letters continues to fall
  • Dividend payment suspended

The average rating of stock market analysts:

Buy

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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