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IDS - recovery at Royal Mail is underway

International Distribution Services (IDS) reported a 9.8% rise in third-quarter revenue to £3.6bn.

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International Distribution Services (IDS) reported a 9.8% rise in third-quarter revenue to £3.6bn. Growth was driven by Royal Mail, which saw a 13.1% rise in sales and a 21% rise in parcel volumes as it won back customers following strikes in the same period last year. The international parcel service, GLS, saw sales growth of 4.4%.

Declines in letter volumes have normalised to the longer-term trend of 6-8% a year.

The £169mn loss seen over the first half is expected to be offset by a similarly sized gain over the second, pulling the full-year figure to around breakeven.

The shares were broadly flat in early trading.

View the latest IDS share price and how to deal

Our view

Trading at Royal Mail over the important Christmas period was good enough to keep the recovery ticking along. It was vitally important for IDS, Royal Mail's parent company, that things moved in the right direction, given a push to bring on temporary workers over the period. But, it's worth keeping in mind growth was flattered by strike actions in the same period last year. It's far too early to call the recovery a success.

There's a lot to do, and the underlying business is under some pressure. Parcel volumes are down from the booming demand seen over the pandemic, and letters have long been in a structural decline. As the UK's universal postal service, Royal Mail is obligated to deliver letters six days a week. But maintaining an infrastructure built for 20bn letters when you're now only delivering 7bn isn't a recipe for an efficient operation. IDS wants to be allowed to right-size infrastructure to reflect the modern-day reality, and conversations are underway with the regulator. But any reforms are likely to be a long time coming.

There has been some decent early progress on the 'five-point-plan' to turn Royal Mail around. It's already delivered a 10k headcount reduction which should somewhat offset the increased costs coming due to the pay agreement with the union.

For now, winning back customers lost during strike actions over the past year or so is a major focus. Returning Royal Mail to profitability will rely on top line growth. Until that happens, hopes of breakeven profit for IDS at the group level is entirely propped up by the international business, GLS. Management has previously hinted that splitting the two businesses is an option - that looks less likely now that the Group is investing in Royal Mail's recovery.

We're encouraged that GLS is still growing revenue, and we believe this division has some long-term growth opportunities, but growing margins is proving to be a challenge. That may become easier if inflation subsides further. Potential bolt-on acquisitions to GLS are also on the table.

A possible return to dividends has also been floated in front of shareholders, but given the ongoing issues it's unlikely to be material for now, and there can be no guarantees.

The agreement with the unions whilst welcome is certainly proving to be no magic wand. The expected return to profitability is still some way out, and there's a vacant CEO role to fill at Royal Mail. Ultimately, we still see a lot of uncertainty ahead as IDS grapples with new leadership and operational adjustments at Royal Mail.

IDS key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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 disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 18th January 2024