Interactive Investor

Little optimism for Royal Mail shareholders 10 years after privatisation

26th January 2023 15:46

Graeme Evans from interactive investor

Relief rally cannot allay fears over further industrial action and falling letter volumes.

A bleak winter for strike-hit International Distributions Services (LSE:IDS) today left small shareholders with little cause for optimism as they approach a decade of their Royal Mail ownership.

The shares rose 2% or 4.6p to 224.2p on relief in the City that Royal Mail’s loss for 2022-23 will be no worse than the £350 million to £450 million range previously forecast, even though 18 days of industrial action was six more than expected.

The unchanged guidance reflects tight cost control and strike contingency measures, although it is also based on no more strike days and the Communication Workers Union accepting the company’s “best and final” pay offer.

Both sides appear entrenched in their positions and Liberum analyst Gerald Khoo said today that a resolution to the long-running dispute appeared distant.

He added: “We still see downside risks from more strikes and customer attrition. With no credible solution to the problems at Royal Mail, our recommendation remains sell.”

Khoo’s price target has been at a lowly 115p since October, when he downgraded his position in the belief that the company’s problems go much deeper than the current crisis.

He pointed out that longer-term prospects were hit by a lack of pricing power, with savings from redundancies only sufficient to stabilise margins on a temporary basis.

Royal Mail shares were 630p during pandemic lockdowns in April 2020, a period of trading that ultimately led to the return of £400 million of surplus cash to shareholders through a special dividend and buyback.

Shares made their debut at 330p in October 2013, when retail investors received an allocation of 227 equivalent to £749.10 at the offer price and now worth closer to £500. The flotation also saw 613 shares handed to each eligible postal worker.

The shares hit a low of 173p in late September but have recovered a little since then as confidence in the UK economy shows signs of improving.

The upturn has come despite significant disruption in Royal Mail’s peak trading season, with parcel volumes for the first nine months of the year down 27% on a year earlier and 16% below 2019. Letters were also weak, with volumes off 13% year-on-year.

Meanwhile, the company’s profitable European parcel delivery operation GLS continues to provide support to the stock market valuation. It saw a 2% decline in volumes in the nine months, but stronger pricing meant revenues still came in 9.7% higher in sterling terms.

Guidance for GLS has narrowed to an annual operating profit between 380 million and 400 million euros (334 million-£352 million), although Khoo sees the risk of significant value leakage in order to restructure and recapitalise Royal Mail in the UK.

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