Parcels are still the biggest growth thanks to online shopping.
Royal Mail’s profit warning softens blow for lacklustre results
- Letters division remains biggest headwind as volumes and revenues fall 7%
- Operating profits fell 25% YoY but interim dividend raised a little
- We currently recommend Royal Mail as a ‘hold’ for medium risk investors
This has been a much anticipated set of first half results from Royal Mail following an unscheduled update in early October that shocked the markets and left the shares to plunge by more than 20% on the day.
During the first six months, group underlying revenues climbed by just 1% driven up mainly by the fast growth in its smaller European GLS business where revenues climbed by 9%. However, the troubles for the business are in the UK with its UKPIL division where revenues fell by 1% overall. Given the nature of our evolving shopping habits, parcels volume growth and revenues continued at 6% as indicated in the last update, this is good but it’s the UK letters market that is the real problem. As already guided earlier, letter volumes and revenues here fell by 7%.
Elsewhere, adjusted operating profits before transition costs were also disappointing falling from £323m this time last year to £242m, partly as a result of the issues in the letters business, but margins also headed lower in the GLS business as a result of labour market issues and the investment costs associated with its expansion.
Overall the performance figures are disappointing, but the previous warning in October has softened the blow for today. The new management will keep a focus on transforming the organisation, with a greater emphasis on being customer focussed with a clearer focus on financial performance and management accountability.
Royal Mail kept its outlook for the remainder of the year unchanged at the reduced range of £500-£550m. UK Parcels and GLS are still expected to do well, but the letters volumes will continue to decline at roughly 7% for the second half while it remains on track to make £100m of cost savings. Investors though will be pleased and take some assurances from the fact that the interim dividend has been raised a little to 8p.
For the new management, the task is still a tough one and the industry continues to face many challenges. Competition within the delivery business is getting ever more intense while Royal Mail, unlike its rivals will still be distracted by having to deliver letters even though this is a slowly dwindling market. We take a cautious view on the stock and can still only recommend a ‘hold’ at best for investors seeking a balanced return and willing to accept a medium level of risk.
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