The coronavirus crisis may have led to a surge in parcels, but the costly way the business sorts mail has hindered returns
Royal Mail unlikely to turn a profit without substantial changes
- The group expects a loss this year following increased costs of £85m from handling more parcels, and £75m related to coronavirus measures
- Shares jumped 10% as the results showed stronger numbers than expected, with parcel revenue up by 33% in the UK
- With no profitability on the horizon, and no dividend, we would struggle to recommend the shares
Ahead of an AGM meeting today, Royal Mail’s trading update shows like other logistics businesses; it has been a beneficiary of the current crisis as more people stayed at home and went shopping online instead. In the five months to the end of August, total UK parcel revenues surged by 33% while their European GLS business also experienced strong revenue growth of 19%. These are much stronger numbers than expected and have resulted in the shares surging 10% at the open. However, the letters business, which for so long has been on a steady decline, saw an acceleration lower as a result of Covid as more businesses shut down during the pandemic, limiting business letters and marketing mail and accelerating the switch to e-mail correspondence. The mix of business to parcels and away from letters increased costs by £85m, while additional costs related to Covid-19 added a further £75m.
While parcels and GLS have been doing far better than expected, it does little to change the scenario of a declining legacy business and the fact that it is still likely to make a significant loss in the current year. According to management, they are not expecting to not turn a profit until substantial structural changes are made. Management do not expect the trend in parcels and GLS to change after Covid and, in that regard, they must scale up the business. This may prove difficult as too much of the sorting is done by hand and trying to change will inevitably conflict with the unions, relations that have proved very difficult so far.
While the group and its shares have been resilient during the Covid crisis, there are far too many challenges that the group faces for us to feel comfortable with the shares. The crisis has brought about an accelerated decline in letters while there is far too much competition in the parcels business, with many competitors better adapting to changes the crisis has brought about. Despite today’s near 20% climb so far (fuelled by breakup speculation), the shares overall during the crisis have not had a spurt of confidence and without a dividend, let alone any profitability on the horizon, we would struggle to recommend the shares.
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