Royal Mail profit warning and management changes to overshadow first half results

The day ahead includes first half results from Royal Mail and a third quarter trading update from Bovis Homes

Royal mail
Royal Mail's profits have been hurt by falling letter volumes

Royal Mail Group PLC’s (LON:RMG) recent profit warning and management changes are likely to overshadow the company’s first half results on Thursday.

In an unscheduled trading update last month, the postal operator said it expects full year operating profit before transformation costs of between £500mln and £550mln, well below the £694mln posted last year.

The company blamed the lower profits on a 7% decline in letter volumes in the first half and weaker-than-expected cost savings due to poor UK productivity.

Letter volumes were hit by challenging trading conditions and lower marketing mail following the introduction of General Data Protection Regulation (GDPR) rules.

Earlier this month, the company announced that Sue Whalley, the head of the Post & Parcels UK arm, has stepped down from its board with immediate effect. Chief executive Rico Back will assume direct commercial responsibility for the business.

Having recently announced some big news, Royal Mail’s first half results are unlikely to deliver too many surprises. Investors will want to see what Back has planned to turn around the business.

UBS expects first half revenue of £4.9bn, adjusted earnings (EBIT) of £92mln and an interim dividend per share of 8.0p.

“After the profit warning we expect to hear more about how the company will improve labour productivity (only c+0.1% in H1), as well as developments in the letter and parcel market, particularly around the impact of GDPR on advertising mail volumes,” UBS said.

Investors eye Bovis Homes costs, house prices and home completions 

Bovis Homes PLC (LON:BVS) will update the market on its third quarter trading following a strong first half performance that led the housebuilder to say it expects profits to reach the top end of its expectations.

Like the rest of the sector, Bovis has continued to see demand buoyed by low interest rates and government schemes, such as Help to Buy and the Lifetime ISA, but these measures won’t last forever.

Chancellor Philip Hammond said in this month’s Budget that Help to Buy will end in 2023, so investors will want to see the company building some strong foundations while the conditions are good.   

For any housebuilder, there are three main issues: how many houses can you build? At what cost? And how much can you sell them for? The first two in particular will be a key focus for investors.

Bovis seems to have got a handle on costs, which helped first half profits to rise 41% to £60.2mln. The housebuilder saw total completions increase by 4% to 1,580 homes in the first half with the private average selling price holding steady at £334,700 amid a slowdown in the market.

The company raised its interim dividend by 27% to 19p and said it was targeting a “record year of profits in 2018".

UBS said: “We recall that Bovis' last update was in early September, with sales rates (reservations per site per week) stable over Jul/Aug at 0.5x. We expect a similar level for Sep-Oct given Bovis' controlled production rates. We expect mid-term targets to be reiterated: 4,000 legal completions by 2020, operating margin to recover to 18.5% and return on capital employed of 25%."


Significant announcements due:

Interims: Royal Mail Group PLC (LON:RMG), Mediclinic International Plc (LON:MDC), Dart Group PLC (LON:DTG), Norcros PLC (LON:NXR), Urban Logisitics REIT PLC (LON:SHED)

Trading updates: Bovis Homes Group PLC (LON:BVS), Close Brothers Group PLC (LON:CBG), Safestore Holdings PLC (LON:SAFE)

AGMs: Avation PLC (LON:AVAP)

Ex-dividends to chop 16.2 points off FTSE 100 index: J Sainsbury plc (LON:SBRY), Marks & Spencer Group PLC (LON:MKS), Royal Dutch Shell PLC A and B shares (LON:RDSA) (LON:RDSB), GlaxoSmithKline PLC (LON:GSK), Bunzl PLC (LON:BNZL), Scottish Mortgage Investment Trust PLC (LON:SMT)

Economic data: UK retail sales; US weekly jobless claims; US retail sales, US import/export prices; Philly Fed manufacturing index; Empire State manufacturing index

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