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Royal Mail - CEO goes as letter volumes collapse

Nicholas Hyett, Equity Analyst | 15 May 2020 | A A A
Royal Mail - CEO goes as letter volumes collapse

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Royal Mail PLC Ordinary GBP0.01

Sell: 174.50 | Buy: 174.90 | Change -4.85 (-2.70%)
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CEO Rico Back is stepping down with immediate effect, with Royal Mail's recently appointed Chairman Keith Williams stepping in as Executive Chair.

The group has seen a dramatic decline in addressed letters since the end of March, more than offsetting increased parcel volumes, with UKPIL revenues down £22m in April. The situation in the international GLS business is "evolving".

The shares were broadly flat in early trading

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Our View

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

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.

However, the real problems stem from the fact Royal Mail wasn't in the 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 though, and the shift to delivering parcels straight to consumers (rather than between businesses) has the potential to disrupt profits.

The structural headwinds led former 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 efficiency 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.

All that has led to a reshuffle at the top. Newly appointed Chairman, now executive Chairman, Keith Williams will have his work cut out until a new CEO is appointed. The former British Airways executive has experience dealing with a heavily unionised workforce, but the challenges posed by coronavirus are another matter.

Royal Mail's saving grace, as it has been for some time, is a pretty healthy balance sheet and significant levels of liquidity. However, we suspect the group is burning through cash at a fair rate of knots in the current climate and that places a time limit on how long Keith Williams has to turn the ship around. If conditions haven't improved by the end of the summer things will become increasingly challenging.

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Coronavirus Trading Update

UKPIL saw letter revenue fall 23% in April and May, with 308m fewer addressed letters sent (a fall of 33%). This was partially offset by a 31% increase in UK parcel volumes, equivalent to 36m more parcels, with parcel revenue up 20%. UKPIL costs rose by £40m driven by coronavirus related disruption.

The GLS international business has seen a shift from B2B to B2C parcels across all its markets. That's driving significant volatility in parcel volumes, with the situation continuing to evolve.

Royal Mail currently has around £1.8bn of cash and undrawn borrowing facilities on hand.

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