After the week Royal Mail has had, shareholders in its parent company International Distributions Services PLC (LSE:IDS) might agree with analysts that the time is nigh to sell up.
That is the view of analysts at investment bank and brokerage Liberum Capital.
“We believe Royal Mail continues to face short-term revenue headwinds from weak online retail volumes,” Gerald Khoo, a stock market analyst at the broker said in commentary on Tuesday.
“We also anticipate long-term pressures on revenue growth in parcels in a competitive market that continues to struggle with excess capacity, which limits pricing power.
“Meanwhile, the structural decline in letters volumes continues, with signs that the pandemic has accelerated this.”
On Monday, Royal Mail was slapped with a £5.6 million fine from regulator Ofcom for missing delivery targets for the year to March.
The regulator found that Royal Mail delivered just 73.7%, less than three-quarters, of First Class mail on time.
Its prioritisation of parcels over letters “has confirmed a key challenge for Royal Mail”, Khoo said in a large-cap comment piece yesterday.
He added that Ofcom’s concern that managers lack control over decision-making in local offices “validates our concerns about Royal Mail’s ability to successfully implement restructuring”.
Ofcom said in a statement on Monday that "high absence and vacancies" had led to poor on-the-day decisions about deliveries.
“Successful restructuring might largely offset cost inflation, but no business can cost cut its way to sustainable long-term earnings growth,” Khoo said.
Royal Mail plans to undergo a restructuring, but according to analysts the effects of this are not expected to be visible until the second half of the fiscal year.
The postal delivery service has not grown revenue by more than 1% a year since it was privatised in 2013.
Analysts at Liberum do not anticipate a significant change in its ability to grow sales going forward, citing concerns over the company’s US operations that they believe “remain lossmaking”.
The broker has rated parent company IDS’s stock as a ‘sell’ on a target price of 180p, a quarter less than its current share price.