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IDS - strikes at Royal Mail hinder performance

International Distribution Services (IDS) has reported full-year revenue of £12.0bn, down 5.3%.

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International Distribution Services (IDS) has reported full-year revenue of £12.0bn, down 5.3%. The drop was driven by performance at Royal Mail, where revenue fell 13%, as it struggled due to industrial action and a decline in volumes across parcels and letters. GLS saw revenue rise 10.2%, as higher prices more than offset a small dip in volumes.

There was an underlying operating loss of £71m at the Group level, driven by a £419m loss for Royal Mail - though that wasn't as bad as analysts had forecast. Reported figures were impacted by an impairment charge of £539 million as the carrying value of Royal Mail was reduced.

There was a free cash outflow of £89m, compared to an inflow of £420m the prior year. Net debt, including leases, rose from £985m to £1.3bn.

The pay agreement for Royal Mail workers is awaiting sign-off from Union members. For the coming year, IDS is aiming to bring underlying operating profit into positive territory.

The board has not recommended a final dividend.

The shares fell 4.2% in early trading

View the latest International Distribution Services share price and how to deal

Our view

It's been difficult to find too much to get excited about at IDS recently, as the owner of Royal Mail has felt the hefty impact of Union battles over the past year or so. Results show the full extent of the damage caused by 18 days of strikes alongside a weaker macro environment, with revenue at Royal Mail down over £1bn.

The silver lining is that performance wasn't quite as bad as analysts had forecast, and an agreement is now in place with the Union on pay; the final hurdle is a vote from Union members, which should end the lingering threat of further strike action.

That means IDS can get back to concentrating on hiring a new CEO for Royal Mail and returning the business to profitability, which it expects to do over the next couple of years.

To be fair, 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.

There's a lot to do, and aside from union troubles, the underlying business is also under some pressure. Parcel volumes are down from the booming demand seen over the pandemic, and letters have long been in a structural decline. The day-to-day business is losing cash, and real estate disposals are on the cards to offset that outflow - rarely a good position.

It's unsurprising to see the board not recommend a final dividend. In our view, the prospective yield of 6.6% is unlikely to materialise.

There are some bright spots. We're encouraged that GLS is still growing revenue, and we believe this division has some long-term growth opportunities. Investment, which was previously stacked toward Royal Mail, will swing further in GLS's favour - the right move in our view, but remember that broader conditions might create some near-term challenges.

Management has previously hinted that splitting the two businesses is an option - that looks less likely now that Royal Mail has a path back to profitability but not something to rule out.

The agreement with CWU is a step in the right direction. Next up is finding a new CEO at Royal Mail and returning the business to profitability whilst maintaining progress at GLS. If that sounds like a lot, that's because it is. There are substantial hurdles to overcome.

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 May 2023