Royal Mail bullish after summer update

The FTSE 100 company is in much better shape now and the dividend is attractive. Our head of markets shares the latest on the delivery giant.

In some ways the pandemic forced Royal Mail's (LSE:RMG) hand in driving significant change, and the speed and success of this transformation is increasingly evident.

Revenue figures are higher across the board, and notably higher compared to pre-pandemic levels, which the group believes to be evidence of structural change. In particular, domestic parcel volumes and revenues are now rebasing at substantially higher levels than seen pre-Covid, suggesting that the explosion of online trading has had an effect on deliveries which has now become entrenched.

Group revenues overall increased by 8.2% year-on-year for the five months to August and by 17.7% versus 2019. This was achieved by revenue growth of 7.2% within Royal Mail versus 2020 (and 12.1% versus 2019) and of 9.3% (30.5%) in the international GLS business.

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Indeed, the strength of trading over the last year has left the group’s balance sheet in much better shape, which also enabled the reintroduction of the dividend. The projected yield of 4.1% is punchy compared to the index average and signals a clear attraction for income-seeking investors given the historically low levels of interest rates.

The current accord with the Communication Workers Union (CWU) also leaves management free to concentrate on the next steps in driving the business forward, most notably with a significant technology modernisation programme alongside a strong focus on reducing non-staff costs.

However, in the meantime costs are providing something of a headwind. Labour shortages in several of Royal Mail’s markets and general inflationary pressures are having an impact, while at the same time the GLS business is up against the forces of increased customs processing and reduced air freight capacity, also affecting volumes.

As such, the group is mindful of these factors in an outlook which is understandably cautious, and which will become clearer as the effects of the Delta variant wane. Assuming that the UK economy continues its recovery momentum after the withdrawal of various fiscal and monetary stimuli, the group is projecting a first-half adjusted operating profit of £395 to £400 million, with a higher figure to follow in the second-half.

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The shares may not have regained the peak level of 630p attained in May 2018, but a more recent sustained spike in the price enabled the group to recapture its place within the FTSE100 in May. The shares have doubled over the last year, as compared to a rise of 20% for the wider top 100 index, and optimism continues unabated on prospects, with the market consensus still coming in at a 'strong buy'.