Royal Mail PLC (RMG) Ordinary GBP0.01
HL comment (22 May 2019)
Royal Mail saw underlying revenues rise 2% in 2018, led by a strong result from the international GLS business. Underlying operating profits fell 34% to £376m, as declines in UK letter volumes hit margins and higher margins costs negatively affected the international business too.
The dividend rose 4% this year, with a final dividend of 17p announced alongside results. However, management's desire to increase investment means the full year dividend is being rebased going forwards to 15p a share, with the possibility of additional payouts in years with excess cash flow.
The shares fell 1.4% in early trading, following a fall of 7.7% the previous day.
Royal Mail's selling point has always been that years of public ownership means it's got plenty of space to become more efficient. That would boost margins - helping profits grow even if revenues struggle.
Disagreements with the unions last year suggested the group might find it harder to deliver the cost savings than expected. And it turns out the cost of averting industrial action has dramatically slowed productivity gains.
Adding to the pain is a letters business which is struggling even more than expected - mainly thanks to a collapse in marketing mail. Nor are cost problems limited to the UK, with rising expenses also denting results in the international parcel business GLS - previously something of a star.
Against that background it's perhaps no surprise that CEO Rico Back has decided drastic action is needed. The group will be automating its UK sorting operations - with a particular focus on improving efficiency in the manual parcels sorting process. Along with existing spending plans, that will see the group invest £1.8bn in the UK postal system over the next 5 years.
The overseas business is also attracting attention, with investment behind organic growth as well as acquisitions. A focus on growing scale in B2B parcels underpins the division's target for revenue of EUR4.5bn by 2023/24.
Unfortunately all that extra investment comes at a price, and the first casualty has been the dividend. The payment to shareholders will be 40% lower next year and the commitment to grow it has been scrapped as well. Although there's theoretically room for additional returns from time to time, don't forget that even the 6.6% yield implied by today's announcement depends on cash coming in as planned.
A balance sheet that's still relatively unburdened by debt is in the group's favour, but these kinds of major organisational restructures are expensive and risky.
Full Year Results
UKPIL revenues, which includes UK letters and parcels, were flat year-on-year at £7.6bn. Growth in parcels, with volumes up 8% and revenues up 7%, offset increasingly tough trading in the letters business where volumes declined 8%, with revenues down 6%.
Addressed marketing mail continues to be a particularly tough area, reflecting structural decline, economic uncertainty and the effect of GDPR. The combination of reduced volumes and lower than expected productivity gains meant underlying operating profits in the division fell 48% to £234m.
The GLS business saw revenue rise 8% to £2.9bn. However, operating profit for the division fell 9% to £177m, as cost pressures continued to mount in the majority of markets.
Free cash flow turned negative during the year, mainly because of £220m of acquisitions in the GLS business. As a result the Royal Mail finished the year with net debt of £300m, versus net cash of £14m last year.
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