Market reacts positively to the posted report
Royal Mail delivers positive results boosted by internet shopping
- Overall trading was in-line with expectations as underlying group revenues increased by 2% and Royal Mail’s Tracked Returns services saw volume growth of 24%
- Shares responded positively to the news with a 3% increase in early morning trading
- We continue to recommend Royal Mail as a medium risk ‘hold’ for income seekers
Royal Mail, under the leadership of new CEO Rico Back, has provided an update this morning suggesting that overall trading was in-line with expectations with underlying group revenues increasing by 2%. It was always expected that its traditional letters business would continue to feel the effects of a structural decline in the use of letters, but this has been exacerbated by the recent GDPR data rules which imposes restrictions on the use of addressed marketing letters.
Addressed letter volumes and revenues fell by 6% and 7% respectively, which was at the extreme end of their previous guidance. Going forward, they still expect declines similar to this for the rest of the year; however it could get worse if business uncertainty remains.
There was better news with parcels where volumes and revenues increased by 7% and 6% respectively, largely accounted for by our love of internet shopping. A growing feature of internet shopping is that more customers are returning faulty or unwanted products back to retailers and Royal Mail’s Tracked Returns services saw volume growth of 24%. Their Parcelforce Worldwide volumes were a healthy 4% but due to the loss of a customer base they expect volumes to dip in the remainder of the year. Meanwhile their smaller European parcels business, GLS continues to experience a ramp up in volumes as expected, up by 10%. Volumes were strong in many European countries aided by the opening up of new depots.
The market has reacted this morning in a fairly upbeat mood with the shares up by 3%. However, all focus will shift to the AGM later this week where executive pay will come under scrutiny. Outgoing CEO Moya Greene is expected to receive a handsome payoff and Rico Back’s salary is suggested to be excessive compared to his predecessor’s pay.
Since the share’s promotion back into the FTSE 100, its share price performance has been a little disappointing and this could be explained by the GDPR data regulations. However, there still remain concerns about the level of competition in the sector which could impact on margins. Meanwhile Brexit and macro-economic uncertainty will weigh on parts of the business. We take a balanced view on the shares and continue with our ‘hold’ recommendation but the shares will still be attractive for income seekers.
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