We don’t support this browser anymore.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

Skip to main content
  • Register
  • Help
  • Contact us

Royal Mail - Christmas delivers a mixed bag

Equity research team | 19 January 2017 | A A A
Royal Mail - Christmas delivers a mixed bag

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Royal Mail PLC Ordinary GBP0.01

Sell: 268.40 | Buy: 268.80 | Change -0.70 (-0.26%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

Performance over the Christmas period was no surprise, with growth in the European business and a small improvement in UK parcels helping offset a continued decline in letter volumes.

Underlying group revenue for the nine months to 25th December was flat, while the UK business (UKPIL) saw revenues fall 2%. The shares fell 3.7% following the news.

Our View

We've come to expect solid, if uninspiring results from Royal Mail - with perhaps a touch of glamour from double digit European growth. The UK business remains sluggish with letter volumes declining, albeit in line with company expectations, and competitive pressures in the UK parcels business showing little sign of easing.

UK parcels was supposed to be the growth engine for Royal Mail. So it is somewhat disappointing 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. That looks unlikely to let up, with Deutsche Post, the big boy of European post, stepping into the market through the acquisition of struggling UK Mail in September.

However, we feel Royal Mail is in a much better position than other postal operators to weather the storm. It is by far the largest player, with around 50% of the UK parcel market, so can invest more in technology and service. Importantly 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 reasonably well in a tough environment. The UK parcels business isn't growing much, but nor is it in decline. Progress on cost cutting is being made, if slowly. The group has a healthy balance sheet, underpinned by a substantial London property portfolio. Although significant pension commitments remain a concern for the medium term, the prospective yield of 5.5% looks well underpinned.

Q3 Trading Update

The 2% fall in UKPIL revenue was driven by a 5% decline in letter revenues, partially offset by a 3% improvement in revenues from parcels.

Within UK parcels, volumes increased by 2%, driven largely by Royal Mail account parcels while express delivery business Parcelforce Worldwide saw volumes fall 1%. UK Letter volumes declined 6%, at the upper end of Royal Mail's expectations, with business and advertising letters hit particularly hard by the overall business uncertainty in the UK. Marketing mailing continues the trend reported at the half year, when revenue fell 8%.

The European GLS business continued to deliver a good performance, with volumes up 8% and revenues up 9%. Revenue growth was achieved across all key markets, with the exception of Ireland, while the Spanish and Californian acquisitions are performing in line with expectations.

Royal Mail's cost avoidance plan is targeting £225m in costs avoided this year, with a 1% fall in underlying UKPIL operating costs. The group remains confident of reaching this target and that cash investment will be no more than £500m this year and next. The consultation on the future of the Royal Mail Pension Plan is ongoing, and expected to conclude in March.

Guidance for the full year remains unchanged.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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.

More share research