Royal Mail reversal of fortune continues in the new year

Bumper Christmas trading spills over into 2021, as letters do better than expected.

The astonishing reversal of fortunes at Royal Mail (LSE:RMG) continues, as the momentum of bumper Christmas trading has spilled over into the new year.

A trading update confirms the previous earnings upgrade, and the company is now expecting adjusted operating profit of £700 million, compared to £325 million in the previous year.

This has partly been driven by better-than-expected volumes at its ailing letter business, where the inexorable rise of online activity has led to physical cards and letters being the subject of terminal decline.

The restructuring charge is also likely to have improved, now estimated at £90 million as opposed to the £140 million originally envisaged.

Meanwhile the international General Logistics Systems (GLS) business remains the hub of growth. On these estimates, GLS is likely to contribute half of adjusted operating profit this year, with a comfortable profit margin of 8.7%, and with the aim of increasing free cash flow to €1 billion (£853.2 million) and operating profit to €500 million by 2025.

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In the meantime, the strength of the trading performance has led to the reintroduction of a dividend payment. In terms of historical comparison, the amount is little more than a gesture, but a new policy will be confirmed at the full-year results in May.

Challenges remain, however, and the group will need to be alert. Competition is particularly fierce in the parcels business. It is not yet clear whether the current volumes are at a temporary peak, as customers have been driven to online shopping from their homes during the pandemic.

At the same time, the effect on business volumes after the return to some kind of normality is also difficult to gauge, while hefty ongoing investment will be required to maintain progress so far.  

Along the way, it has been nothing short of a rollercoaster ride for investors.

From the initial float price of 330p in 2013, the shares peaked at 630p in May 2018 and then troughed at 124p in April 2020.

Over the last year, the shares have risen by nearly 290% to the current level of around 510p, as compared to a rise of 47% for the wider FTSE 250.

Such has been the strength of the rise that Royal Mail would be a strong contender to regain its FTSE 100 status at the next reshuffle. The company is currently being cheered from the sidelines by investors, with the market consensus being that the company has done a complete U-turn over the last year and is now coming in at a strong ‘buy’ on prospects.