Royal Mail retests record low after latest results

Another lacklustre update has sent Royal Mail shares tumbling toward recent lows. Richard Hunter, head of markets at interactive investor, tells us exactly why and examines recovery potential.

Unlike the shock profit warning in October, which wrongfooted investors given that it was announced late in the trading day, these numbers have been delivered on time. Even so, the update still makes for generally uncomfortable reading.

It had been hoped that this set of figures would be accompanied by a strategy update, but this is not likely to arrive in detail until a Capital Markets day in March. Meanwhile, this leaves investors to pore over any number of weaknesses – margins under pressure, earnings per share suffering a precipitous drop, pre-tax profit down 57% and net debt up 23%. 

The productivity and cost avoidance issues which were responsible for the share price collapse in October remain at the top of the to-do list, while the important Christmas period now takes on additional significance for Royal Mail given the challenging backdrop.

Source: TradingView (*) Past performance is not a guide to future performance

Chinks of light in the statement are few and far between. 

There was a marginal 1% rise in revenues, the cost avoidance target of £100 million has been reconfirmed and the performance from UK parcels has at least ticked higher. The international business, GLS, has managed to post a 9% increase in revenues, although it is also facing its own pressures. 

From a longer-term perspective, there may be some emerging benefits from diversification – parcel revenues, offsetting the terminal decline in the letters market, now account for 62% of group revenue. Geographically, non-UK revenues have also risen to 38% of the group total and both of these should provide an element of defensiveness in due course. 

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In the background, the dividend yield of 6.9% - part of the hike being explained by the recent weakness in the share price – is covered and at least provides some solace for income seekers.

The small pop in the opening share price did little to repair the recent damage. In May of this year Royal Mail shares stood 45% higher than today, which has likely cemented the group's relegation from the premier index at the next reshuffle in December. 

Over the last year, the picture is slightly better, with the shares having dropped 9%, as compared to a 4.6% dip for the wider FTSE 100. 

However, quite apart from the increasing competitive pressures from the likes of Deutsche Post and Amazon, Royal Mail has a long road ahead to recapture any former glory, and the market consensus of the shares as a sell seems likely to remain entrenched for the time being.

*Horizontal lines on charts represent levels of previous technical support and resistance.