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Revenues Surge, But Profits Slide At Royal Mail

Published 19/11/2020, 08:09
Updated 03/08/2021, 16:15

This year’s economic lockdowns have made Royal Mail (LON:RMG) an unlikely winner in this year’s pandemic lottery, though the Royal Mail share price did hit a record low of 120p in April before the turnaround in fortunes.

Since then we’ve seen a slow steady recovery, however, we still remain some way short of the IPO price of 330p, which at the time politicians were criticising the government for selling off too cheaply.

While the shares did trade a great deal higher initially the reality was that the shares were always way too expensive when compared to other organisations in its sector space.

It took a while for investors to wake up to this fact, but wake up they did, with the management of the business also playing a part in the share price decline, with a tone-deaf approach to industrial relations.

One of Royal Mail’s many problems in the past has been its higher cost base relative to its peers as well as its loss-making letters division, and today’s latest numbers have served to highlight that particular problem.

First half revenues increased by 9.8% to £5.67bn, however, due to a sharp rise in costs the business slumped to an operating loss of £20m, driven largely by Covid-19 related costs of £85m, as well as other business costs, including voluntary redundancy of £147m.

Profits before tax came in at £17m, down over 90% from a year ago.

Addressed letter volumes were down 28%, with total letter volume down 33%, with adjusted operating losses here coming in at £180m, and revenues falling by 20.5%, however, parcel volumes more than compensated with a rise of 31%, and a rise in revenues of 33.2%.

The performance in its GLS division also saw an increase in revenues of 21.7%, helping push operating profits in this area up to £166m, a rise of 84%.

In terms of guidance, management nudged revenue expectations for the rest of the year upwards by £380m to £580m, however, costs could also increase as well. Management also reserved the option to reinstate the dividend sometime next year, after cancelling the 7.5p dividend earlier this year.

Now that Rico Back has departed as CEO, management now has the opportunity to re-engage with the workforce and help push through further efficiencies to make Royal Mail work practices more in line with the 21st Century.

Management have said that talks with the CWU are encouraging in this regard when it comes to dealing with the upcoming challenges of an uncertain outlook for Q4, though Q3 appears to be going well so far.

We’ve already seen some innovative thinking in this regard with the rolling out in October of the new collection from home service, which allows customers to have their parcels collected from as little as 72p.

The outlook for the business is much more positive now with the company recently competing with Amazon (NASDAQ:AMZN) for a £550m one-year contract to deliver 215k Covid-19 testing kits a day in the UK.

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