Royal Mail has released full year results which are broadly in line with expectations. Group revenue increased by 1% to £9,251m and underlying operating profit came in at £742m, up 5%. The full year dividend was also increased by 5% to 22.1p. The shares fell by 2% in early morning trading.
UK Parcels, International and Letters (UKPIL) revenue was down 1%, with parcels revenue up 1% and total letter revenue down 2%. Addressed letter volumes decreased by 3% - better than the group's forecast-range of a 4-6% decline per annum - due to the exit of some competitors, which had a positive impact of around one percentage point.
Parcel volumes were up 3%, with growth in import parcels, account parcels and Parcelforce Worldwide, partially offset by a decline in international export parcel volumes. Revenue reflected a weaker mix due to declines in high average unit revenue (AUR) parcels.
UKPIL operating costs before transformation costs declined by 1%. The group avoided £182 million of costs in the year, and is on track to avoid around £500 million of cumulative annualised costs over the three financial years to 2017-18. Transformation costs associated with this programme increased by almost a third to £191m.
GLS, the European parcels business, performed strongly throughout the year. Volumes were up 10%, with revenue increasing by 9%.
Net debt was £224 million at 27 March 2016, £51 million lower than the same period last year.
Market trends in the UK remain broadly unchanged with the environment remaining highly competitive in UK parcels. Revenue growth in GLS is expected to slow in 2016-17, as competitive pressures intensify. Royal Mail will continue to invest in new products and services, while focusing on efficiency measures and cash flow to support the progressive dividend policy.
Royal Mail has delivered a solid, but uninspiring, performance in FY16. Double-digit revenue growth in European parcels was a highlight, while the decline in UK letters was smaller than expected. However, competitive pressures in the UK parcels business show no signs of easing.
UK parcels was supposed to be the growth engine for Royal Mail, with the UK letters business in decline. So it is somewhat concerning that conditions in the UK parcel market look set to remain challenging. The demise of rival City Link in December 2014 has been followed by a host of announcements from other parcel operators warning of pricing pressures. Amazon choosing to launch its own delivery network compounds the issue. Overall, Royal Mail estimates that there is around 20% annual spare capacity in the market.
Royal Mail is in a much better position than other postal operators to weather the storm, we feel. It is by far the largest player, with around 50% of the UK parcel market, so can invest more in technology and service. There is plenty of scope to reduce costs, having spent so long in public hands. This should help to support profits, at a time when rivals are seeing margins squeezed.
We think Royal Mail is performing well in a tough environment. The UK parcels business isn't growing much, but nor is it in decline; while costs are being very tightly managed. The group generates good cash flows and has a healthy balance sheet, underpinned by a substantial London property portfolio. As such, the prospective yield of 4.5% looks well underpinned, although remember all yields are variable and not guaranteed.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.