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Royal Mail - no final dividend, weaker profits, guidance scrapped

Nicholas Hyett, Equity Analyst | 27 March 2020 | A A A
Royal Mail - no final dividend, weaker profits, guidance scrapped

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Royal Mail PLC Ordinary GBP0.01

Sell: 508.80 | Buy: 509.00 | Change 7.60 (1.52%)
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The coronavirus outbreak is expected to negatively impact profits in both the UK letters and parcels (UKPIL) and international (GLS) businesses in the coming financial year.

Royal Mail continues to expect underlying operating profits of £300-£340m in 2019-2020. However the group has suspended guidance for 2020-2021 and all future periods, with delays to the Journey 2024 plan.

The group has access to over £800m in cash plus £925m in credit facilities.

The board will not propose a final dividend.

The shares fell 7.1% in early trading.

View the latest Royal Mail share price and how to deal

Our View

Royal Mail is in a better position than some companies, in that its core letters and parcels business does at least continue to operate. The increase in online shopping is even providing a boost to some parts of the business.

Overall though the significant fall in postal volumes both in the UK and internationally looks set to decimate profits this year. The group is nursing cash flow through the lean times, with the result that the full year dividend has been scrapped.

It doesn't help that Royal Mail wasn't in best shape to weather a downturn to begin with.

Disagreements with unions mean cost savings have proven harder to deliver than expected. In fact, efforts to avert industrial action means costs are increasing. Meanwhile the letters business, which is probably in terminal decline anyway, has seen marketing mail collapse and parcels has turned out to be an unexpectedly competitive business. The combination of falling revenues and stubbornly high costs is stamping out UK profit margins.

There's been better news from the international operations. A few years ago we would have described this unit as small, but impressive growth, acquisitions and a struggling UK operation mean it's accounted for the majority of profits recently. The division is far from immune to the coronavirus disruption, but at least profits should stay in positive territory (unlike the UK).

The structural headwinds led CEO Rico Back to announce a major restructuring plan not so long ago. Royal Mail is looking to automate its UK sorting operations - with a particular focus on improving efficiency in parcels. Along with existing spending plans, that was set to see the group invest £1.8bn in the UK postal system over 5 years.

Unfortunately all that investment comes at a price, and in the current environment that price may be too high. The group has pushed back the deadline on efficacy and profitability targets from 2024 to a yet to be determined later date and will still have strike action to deal with once the current crisis has passed.

The all-important question in the short term is how long will the current lockdowns last, and unfortunately there's no ready answer to that. Royal Mail reckons it has the liquidity to weather disruption for some months, but if conditions haven't improved by the end of the summer things will become increasingly challenging.

Coronavirus activity

UKPIL is expected to be "materially loss making" in 2020-2021. The division has seen a significant decline in marketing mail since coronavirus disruption hit the UK, however, business mailings are holding up well. Management expect recent restrictions of freedom of movement to have a negative impact on unsorted and stamped mail going forwards.

Business-to-consumer (B2C) parcels have performed well, boosted by increased online shopping. However, the Tracked Returns product has been weaker than expected, reflecting lower volumes from clothing retail. Post Office volumes have declined. The small business-to-business (B2B) has seen volumes decline. International volumes have also declined.

GLS profitability will be significantly reduced in the next financial year. There has been a dramatic decline in B2B parcels, partially offset by growth in B2C parcels. Disruption has been particularly bad in Italy, France and Spain, where restrictions are most stringent.

The group is seeing increased levels of sickness across both GLS and UKPIL, any may have to reduce service in some areas.

If current trends continue Royal Mail is confident that it has sufficient liquidity to stay within the conditions set by its lenders. However, that would become increasingly challenging if current disruption were to continue past September.

Following guidance from the FCA and FRC, the announcement of full year results has been delayed from 21 May 2020. A new date will be released in due course.

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