It’s almost Christmas, when the country turns to Royal Mail (L:RMG) for its Christmas card and present deliveries. As such, all eyes are on the postal service’s first-half results.
Group revenues came in line with expectations at £4.4bn but some success in reducing operating costs meant operating profits before one-time costs dropped 1% to £342m, better than the £331m expected. Net profits are still in line to be substantially lower in the year through March 2016 because of corporate restructuring costs.
Royal Mail now has a stranglehold over letter (including Christmas card) deliveries since its main competitor Whistl quit the market, but parcels are where the money is. The boom in e-commerce and strong UK consumer confidence has brought about fierce competition between delivery companies. To date, Royal Mail has struggled in the fight for our online orders.
Royal Mail faces a tough crowd. Shares of UK Mail, one of Royal Mail’s largest competitors dived by over 17% following a profit warning on Wednesday. Markets punished UK Mail for mismanaging the relocation of its head office and delivery hub. Investors in Royal Mail should be savvy to the intolerance shown in the market place for falling behind the curve on restructuring.
Royal Mail is fighting back against the competition with a 4% rise in parcel delivery volumes that helped revenues from parcel delivery rise 1% during the first half. Still, revenues declined 1% across the whole domestic and international letter and parcel business.
Royal Mail currently trades on a forward P/E of 12 and supports a healthy dividend yield of 4.6% that the company hopes to increase to 5.1% by 2017. To achieve the forecasted rise in dividend in the context of falling pre-tax profits and revenues, more cost-cutting is needed.
The biggest concern is that Royal Mail can’t match its more tech-savvy and dynamic rivals on margins and efficiency. Amazon’s move to deliver its own packages not only means Royal Mail has lost its biggest customer but faces perhaps its biggest threat from the disruptive technology Amazon (O:AMZN) can bring to the centuries old market. The government may have now fully disposed of its stake in the national delivery service but a hard stance from regulators and trade unions mean Royal Mail is in an uphill battle against cost cuts.
To her credit, chief executive Moya Green appears to be taking an ‘if you can’t beat them join them’ approach to the competition with Royal Mail’s purchase of same-day delivery firm eCourier. The acquisition gives Royal Mail not only a stake in one of the fastest growing areas of the parcel market but access to the technological expertise that comes with it.
Royal Mail’s H1 results have propelled shares into a new rising uptrend, see the chart below.
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