A pivotal moment for Royal Mail

It is increasingly evident that the pandemic was a pivotal moment for Royal Mail, and so far the group has overcome the challenges with aplomb.

Article updated: 21 July 2021 8:30am Author: Richard Hunter

Richard Hunter, Head of Markets at interactive investor, commented “It is increasingly evident that the pandemic was a pivotal moment for Royal Mail, and so far the group has overcome the challenges with aplomb.

The situation forced the transformation of the company at lightning speed, with a reduction in net debt enabling further investment into the automation of the parcels business, a reduction in controllable costs and the reintroduction of a dividend, with an implied yield of nearly 4%, to starved income-seeking investors.

The question overhanging the future revolves around the burgeoning parcels business. The early evidence is that even after the expected drop in volumes over the last quarter, the direction of travel is clearly promising.

Against strong comparatives against the height of the pandemic, Royal Mail parcel volumes dropped 13% versus last year but perhaps more tellingly, the inevitable trend towards online shopping is evidenced by these volumes being 19% ahead of pre-pandemic levels. At the same time, the GLS business has ploughed on regardless, with a 10% increase in volumes against 2020 and 34% versus 2019.

How much of the elevated levels of online shopping remain will be critical to the group’s ongoing success, but the company is confident that the parcels business is rebasing to higher levels than pre-pandemic, as the letters business continues its inevitable and probably terminal decline.

As such, the quarterly figures read well, with group revenues increasing by 12.5% against 2020, and by 20.2% against 2019. The Royal Mail part of the business accounts for around two-thirds of the total and increased by 12.2% and 13.4%, while GLS added 12.4% and 36.2% respectively.

Challenges remain apart from the structural nature of parcel deliveries on the whole. The group is currently battling reduced air freight capacity and increased costs in fulfilling international orders, while closer to home the economic situation in the UK remains central, with the current Delta variant causing jitters and potentially stalling a nascent recovery. At the same time, competition in the sector remains fierce and the group will need to maintain the progress it has achieved thus far.

Historically, the share price performance has provided a white-knuckle ride for investors. From an 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 turbocharged performance enabled the group to regain its FTSE100 status in June, with the share price rise of 190% comparing to a gain of 9.7% for the wider premier index. The market consensus of the shares remains equally optimistic on prospects, coming in at a strong buy.”

More from Richard Hunter: read more articles directly on the interactive investor website.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Richard Hunter

Head of Markets, interactive investor

Richard has over 30 years of stockmarket experience and is one of the UK’s foremost commentators on market matters and a regular contributor for the BBC (BBC News Channel, Wake Up to Money and the Today Programme), CNBC and Bloomberg. Richard’s expert commentary also appears across the national and specialist press. He previously held senior positions at Hargreaves Lansdown and NatWest Stockbrokers.

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