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Royal Mail boss Rico Back faces uphill battle in bringing shares back above IPO level

Published: 12:19 29 Jan 2019 GMT

Royal Mail
Royal Mail's shares are down more than 10% after a disappointing trading update

Royal Mail Group PLC’s (LON:RMG) chief executive Rico Back has got his work cut out for him in his quest to turn around the business.

The postal operator’s shares have not traded above the 330p issue price of its 2013 initial public offering since last November.

READ: Royal Mail says UK letters volumes and productivity down, shares plunge

Royal Mail was demoted from the FTSE 100 in December after an October profit warning sent its shares crashing. Since then, the shares have fallen another 25%.

Around noon on Tuesday, the shares were trading at 268.7p, down 10.6% on the day, after Royal Mail narrowed its profit guidance range for 2019 in a trading update for the first nine months of the year.

READ: Royal Mail expects letter volumes to miss forecasts and parcel deliveries to slow in 2020

“The 330p issue price from Royal Mail’s IPO is no longer looking either the bargain or scandal which different voices argued it was back in 2013,” said Russ Mould, investment director at AJ Bell.

He added: “All told, there is a huge amount for CEO Rico Back to do if the business is to have a chance of getting back above 330p per share, or even the 455p closing price on its stock market debut.”

The privatisation was criticised for being underpriced, leading taxpayers to miss out on an estimated £1bn at the expense of investors. 

Letters on the way out 

At the heart of Royal Mail’s troubles is the letters business. Letter delivery volumes have been falling as an increasing amount of communication moves online.

The letters division has also been hit by the EU’s General Data Protection Regulation (GPDR). Last year, the EU tightened the GDPR rules to give individuals more control over their personal data and limited the amount of junk mail companies can send.

In the first nine months of 2019, letter volumes fell by 8% and letter revenues dropped by 6%. Royal Mail expects full-year letter volumes to decrease by 7-8%.

For the 2020 financial year, the group warned letter volumes could fall by more than the 4 - 5% decline previously expected due to “business uncertainty”.

“The continuing collapse in letter volumes is the big news in these numbers,” said Nicholas Hyett, equity analyst at Hargreaves Lansdown.

“Royal Mail’s gone out of its way to say that’s down to wider uncertainty, and the introduction of new privacy laws under GDPR, rather an uptick in companies using email rather than paper. Whatever the cause, we suspect those mailings are gone for good."

Parcels facing tough competition

But the letters division is not the only area of concern for Royal Mail.

The international parcels unit, Global Logistics Systems (GLS), has continued to face cost pressures in Europe and the US as it lowers prices to fend off competition from the likes of Amazon, FedX, Hermes, Deutsche Post and DPD.

Royal Mail said prudent pricing initiatives and cost mitigation actions mean it still expects GLS to achieve an adjusted operating profit margin of more than 6% for the year.

However, the decision to protect margins mean it now sees GLS parcel volumes slowing in 2020.

Nevertheless, growth in parcel volumes continued to offset the ongoing decline in letters during the first nine months of 2019, with total revenue rising 2%.

UK parcel volumes and revenues both increased 6% while GLS volumes and revenues rose 5% and 8%, respectively.

“Even in the normally impressive numbers from GLS, cost pressures remain and Royal Mail has announced its intention to focus on margin protection, which will inevitably come at the cost of a loss of some volume growth,” said Richard Hunter, head of markets at Interactive Investor.

“Even if achieved, the overall projected operating profit will be significantly shy of the previous year’s number.”

Royal Mail cuts upper end of full-year guidance, delays CMD

Royal Mail said while its trading has been broadly in line with expectation, it now predicts adjusted group operating profit before transformation costs of £500-£530mln for 2019, down from the previous guidance of £500m-£550mln.

The group also decided to push its capital markets day from March until after the full year results in May.

"Given the importance of understanding management’s long-term strategy to turn the business around, this is disappointing," Liberum said, repeating a ‘sell’ rating.

"The hope must be that more radical options are being contemplated, requiring further time for planning and consultation."

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