Royal Mail and owner International Distributions Services PLC (LSE:IDS)’s shares face further downside from the lack of an agreement with workers, and cannot let it go on any longer, analysts said on Thursday.
There is also a distinct risk seen by analysts that the group will cancel its final dividend, after withdrawing its half-year payout and copping plenty of flack for splashing out a £400mln special dividend just over a year ago just as negotiations with workers were starting.
A nine-month trading update from the letters and parcels group revealed revenues down 12.8%, with Royal Mail parcel volumes and revenues 27% lower than a year ago and 19% below pre-pandemic levels, alongside an acceleration in the decline in letter volumes.
Overseas arm GLS saw some headwinds, with volumes down 3%, but revenue grew 10.2%.
With around £200mln of losses attributed to the strikes so far, guidance was repeated for a loss midway between £350mln to £450mln if there are no more strikes and the Communications Workers Union (CWU) accepts Royal Mail’s best and final offer.
This was despite additional strike days having been announced.
“We still see downside risks from more strikes and customer attrition,” said analyst Gerald Khoo at Liberum, who sees “no credible solution” to the problems at the UK arm.
Russ Mould, investment director at AJ Bell, said parent company IDS “cannot afford to let this problem continue for much longer”, with many consumers and businesses having turned to competitors for more reliable services due to frustration with the delays in their goods reaching their desired locations and “some may never return to Royal Mail”.
While Amsterdam-based GLS has been the saviour for the group in recent years, the tide “also seems to be turning” against it, said Mould, with volumes and margins both down.
Liberum's Khoo, who reiterated his ‘sell’ recommendation and 115p target price, said that both sides in the ongoing industrial dispute “appear to be entrenched” in their positions.
The CWU has initiated a ballot on further strike action threatened under the existing mandate, while on the other side of the negotiating table the “apparent financial resilience of the division in the face of industrial action is likely to embolden management”.
Productivity improvements were poor prior to the dispute, he noted, so even if Royal Mail can reach an agreement to end the current industrial dispute, “we are not confident that management can deliver on restructuring.
“Past operational restructuring initiatives did not deliver the anticipated savings and improvements in productivity. A protracted industrial dispute provides for a worse backdrop for future initiatives.”
Dividend risk
With IDS having declined to pay its half-year dividend and reporting negative free cash flow, Mould said there was a risk the full-year payout might also be denied.
“In November, the company said it might try and pay a full-year dividend out of GLS earnings, but that could cause a political storm,” he said, with MPs already looking to grill boss Simon Thompson for a second time.
Thompson and the board “might want to avoid accusations that it isn’t paying workers enough but is still doling out cash to shareholders”, Mould added.
Despite projecting multi-million operating losses, the markets met the update with a positive reaction, with the shares rising 2.4% to 224.8p by mid afternoon.
Barclays analysts called the update "resilient" and it led to them narrowing their loss forecasts at Royal Mail to £500mln, down from £745mln, to reflect "a more resilient performance" in the past quarter than expected.
This was predominantly driven by better cost control and Barclays reducing restructuring cost expectations by 50% due to a “significantly” lower number of voluntary redundancies now required to meet management's 10,000 full-time role reductions.
Barclays kept its 'equal weight' rating and 250p price target, which was attributed to the "uncertainties around the ongoing union dispute and management’s ability to deliver sustainable multi-year structural reform at Royal Mail".
Such is the state of the disruption at the UK business in recent weeks the quarterly statement “could have been a lot worse”, agreed analyst Matt Britzman at Hargreaves Lansdown.
He gave credit to management on the actions taken to mitigate the impact of more recent strikes.
The group said its plan to stabilise the business is “making good progress and on track”.
As IDS bosses have threatened to split the group in two if Royal Mail cannot resolve its issues, Britzman said it “remains to be seen how long GLS and Royal Mail will remain under the same umbrella”.