As Royal Mail are hit with a negative market reaction this morning, we explain what this means for investors.
Royal Mail posts reasonable quarter but headwinds persist
- Reasonable quarter performance in-line with expectations, boosted by one-off benefits from UK General Election and busy Christmas period
- UK Business only sees revenue growth of 1%, with declines in letter volumes offsetting growth in parcel business
- European focused GLS division continues strong growth rate of 11.1%, lifting Group revenues by 3.7%
- Correction to current dividend yield of 8-9% looks likely
- Recommendation: No formal recommendation but we are cautious, only for the brave contrarian investor.
Despite having a reasonably good last quarter, given a busy Christmas period alongside the boost from the European parliamentary elections and the December general election, the shares this morning have taken a big knock after the results. Excluding the one-off benefits in the last quarter, trading was largely in line with expectations. The UK part of the business only saw revenue growth of 1% as the declines in letter volumes (down 9%) offset most of the gains in the parcels business (up 3%) which itself seems to be slowing amid increased competition. However, the European focussed GLS division continued its strong growth rate of 11.1%, taking group revenues up by 3.7%.
However, the negative market reaction this morning (shares are down close to 9%) is due to the forward-looking aspects. The decline in letters volumes is expected to accelerate to 7-9% for the next year, something the market is getting used to. But the bigger concern is over the potential further industrial action that the CWU is threatening should RMG go ahead with the proposed restructuring of the company. Along with the economic uncertainty, this could see the UK business turn a loss. Effectively, this is a profit warning.
The company though will still press ahead with its transformation plan to pivot it to the modern societies needs and cut back on costs. Investors though are getting increasingly concerned and its once attractive dividend has now reached unsustainable yield levels in the region of 8-9%. A correction to the dividend looks likely in the near future.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.