Royal Mail (LON:RMG) Group [RMG] has been one of the few organisations that has continued working relatively normally throughout the Covid-19 crisis, albeit on the back of some modified working practices to ensure employee safety.
Royal Mail share price stages partial recovery
The Royal Mail share price has managed to recover from its UK coronavirus lockdown lows at the end of March and early April, rising from a low of 119p up to around 173p just ahead of its full-year results.
This is just shy of its share price level three months ago, prior to the lockdown measures. Looking at the slightly bigger picture, Royal Mail shares have been on a steady decline since the 52-week high achieved in mid-December last year.
Royal Mail looks to parcels division
If its parcels division doesn’t come out ahead of expectations, given the higher volume of online business since the March lockdown, it will be a disappointment, despite lowered expectations.
Royal Mail’s last set of annual results in 2019 showed a revenue jump to £10.172bn, up from £9.776bn, which was driven by its parcel services – as parcel revenue grew 4% and parcel volumes rose 5%. On the other hand, letter revenue declined by 4%, with letter volumes down 5%.
With uncertainty in management, coupled with the age of electronic communication, it isn’t hard to see why the letters area isn’t succeeding. In response to this, Royal Mail has continued to capitalise on parcel deliveries. Around 1,400 parcel post-boxes have been introduced across the UK, allowing sellers to post pre-paid parcels – the first major change of the use of post-boxes since their introduction 160 years ago.
Costs cut as CEO Back departs
Last May, Royal Mail cut its dividend in order to free up £1.8bn over five years, as management looked to lower costs. Cost-cutting in terms of its workforce however, could prove to be problematic due to relations with the trade unions, who are likely to push back on automation.
The departure of Rico Back as CEO might be a turning point in this regard though. Management need to reconnect with the workforce, and a new management team might be able to push through some of the necessary changes that need to be made for the business to stay viable. Former British Airways chief, Keith Williams (NYSE:WMB), is taking over as interim executive chairman.
Lockdown hits revenue as costs rise
In November, Royal Mail had a revenue target of £300m-£340m. This could be optimistic, particularly if its letters division underperforms due to the lockdown as widely expected, although its parcels area does have the potential to offset this.
The company updated the market on its performance for April, where revenue in its UK parcels, international and letters (UKPIL) division fell by £22 million in comparison with the same month a year ago. To make matters worse, costs jumped by £40 million, as overtime for workers as well as PPE expenses drove up the outgoings. Royal Mail is seeing a big switch to parcel deliveries and away from letters, and this trend was reinforced last month, with UK parcel volumes jumping 31% in April, while in stark contrast, letter volumes plunged 33%.
Royal Mail is attempting to refocus as online shopping fuels the growth in parcel volumes, and the number of letters sent declines. Mr Williams is now due to lead discussions over an “accelerated pace of change across the business", and the success or otherwise of those discussions, with respect to modernisation and continual improvement in its parcels area, is likely to have a bearing on Royal Mail’s share price over the next few months.
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