Royal Mail PLC (LON:RMG) said a strong performance in its European parcels division continued to lead revenue growth in the nine months to December 24.
The postal delivery group said overall revenue increased 2% over the period with revenue and volumes in European parcels rising 10%.
READ: Royal Mail shares offer 'most robust upside potential', says JPMorgan
UK parcel revenue grew 4% and volumes rose 6% over the period with 149 million parcels handled over the key December trading period.
However, the parcel business faces tougher competition due to new entrants such as Amazon.com Inc (NASDAQ:AMZN).
Better-than-expected decline in letter volumes
Letter revenue was flat with addressed letter volumes falling 5%, though this was better than the company had expected.
Royal Mail now expects addressed letter volumes to be in the middle of the 4-6% decline range it previously forecast for the full year.
The company added that it was making progress in its talks with unions over its plans to replace its defined pension scheme, which has caused a dispute with the Communications Workers Union.
“We have agreed the fundamental principles on some of the key issues and talks are ongoing to finalise these and other areas,” said chief executive Moya Greene.
“We believe we can reach agreement on an affordable and sustainable pension solution and a pay deal that will enable us to continue to innovate and grow."
Shares fell 1.4% to 460.50p in morning trading.
Costs expected to rise
Liberum left its rating on the stock at 'sell' with a target price of 370p.
"We see upward pressure on consensus estimates from the better guidance on letters revenue and transformation costs," said analyst Gerald Khoo.
"However, although the letters performance may carry forward, it is reasonable to expect some catch-up in transformation costs in later years."
Neil Wilson, senior market analyst, said Royal Mail remains highly cash generative and can afford to offer a progressive dividend at a 5% yield. However, he questioned how long its dividend policy can last.
"Declining letter volumes amid a broad switch to electronic communications at the corporate and government level, combined with rising labour costs, could start to leave it exposed," he said.
"Shares are already up more than 20% from the November lows and these in-line results seem to be offering investors a chance to take profits.”