logo-loader
viewRoyal Mail PLC

Royal Mail turnaround plans 'underwhelming' say analysts

“The group’s been over-reliant on the shrinking letters market, and with letter volumes down by a third in recent months that’s left it horribly exposed,” another analyst said

Royal Mail PLC -

Royal Mail PLC’s (LON:RMG) plans to turn the business around were seen as “underwhelming” by some analysts as others said the coronavirus outbreak “has revealed long suspected weaknesses” at the group. 

The FTSE 250 group’s full-year results showed negligible revenue growth and a 25% decline in profits for the past year but trading for recent months has been much worse.

READ: Royal Mail to axe 2,000 jobs as coronavirus hits postal volumes

April and May have seen operating profits slump as letter volumes have crashed by 23mln with advertising mail down by 63%, even though parcel volume and revenues are up by 37% and 28% respectively.

Management expect the group to be materially loss-making in 2020-21 and revealed plans to axe 2,000 jobs, or more than 20% of its managerial staff, as part of a shake-up.

“The short-term measures announced are somewhat underwhelming,” said analyst Gerald Khoo at broker Liberum, “and there is no detail on longer-term measures to deal with the structural challenges.”  

Analyst Nicholas Hyett at Hargreaves Lansdown added: “The coronavirus outbreak has revealed long suspected weaknesses at Royal Mail. 

“The group’s been over reliant on the shrinking letters market, and with letter volumes down by a third in recent months that’s left it horribly exposed. 

“Meanwhile the lack of investment in parcels infrastructure means catering for the sudden spike in online shopping has seen costs rocket, so that the extra revenue is more of a burden than a blessing.”

Richard Hunter at Interactive Investor said the plan to transform the business into “an internationally-focused parcel business, as opposed to the traditionally UK-focused letters business” was “not only obvious and required but long overdue”.

The recent departure of chief executive Rico Back adds further complications, Hunter said, while there remains the longstanding “noose” of the Universal Service Obligation for letter provision in the UK, which he felt needs to be streamlined and perhaps negotiated,.

He felt the pandemic “may yet turn out to be the catalyst the business required”, though the whole transformation will come at a cost.

Having already shelved the final dividend, Russ Mould at AJ Bell said this “demolishes what was left of the investment case for the stock when it was floated. That had rested largely on Royal Mail’s consistent cash flow and dividend yield, although the foundations of that thesis had been crumbling for some time.”

Shares in Royal Mail were controversially floated at 330p in 2013 amid arguments over whether the taxpayer was being short-changed as the price peaked in May 2018 at close to 630p.

At their current levels below 160p the stock has declined, 13% on the day and around 32% since the start of the year versus roughly an 23% drop for the wider FTSE 250 index. 

“As it turns out, it was taxpayers who got the better end of the sale at 330p a share,” said Mould. “Investors, who should have known the risks they were taking with the stock and unfortunately employees, who may not have, got the worst of it.”

Liberum’s Khoo kept his ‘sell’ recommendation intact as he said the main potential upside surprise to his bearish stance would have been an announcement on the sale or spin-off of the GLS arm. 

He saw no indications that such a move is under consideration as interim executive chairman Keith Williams stressed the strategic importance of GLS' international presence, with it needed to support the resumption of dividends for the year to March 2022, said Khoo. 

“This update may offer some glimmers of hope,” said Hunter, “but in terms of investor patience much of the damage has been done. As such, the market consensus of the shares as a sell is likely to remain intact.”

 

Quick facts: Royal Mail PLC

Price: 171.75 GBX

LSE:RMG
Market: LSE
Market Cap: £1.72 billion
Follow

Add related topics to MyProactive

Create your account: sign up and get ahead on news and events

NO INVESTMENT ADVICE

The Company is a publisher. You understand and agree that no content published on the Site constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is...

FOR OUR FULL DISCLAIMER CLICK HERE

Watch

Jubilee Metals CEO welcomes 54% growth in first half operational earnings

Jubilee Metals Group PLC's (LON:JLP) Leon Coetzer caught up with Proactive London's Andrew Scott after reporting its sixth consecutive six-monthly period of double digit growth - posting a 54% increase in first-half earnings to £12.8mln. The company was also able to boost revenue by 18% to...

14 hours, 13 minutes ago

4 min read