Royal Mail delivers better Christmas letters and cost guidance

Royal Mail delivered a solid performance and 150m parcels over the Christmas trading period, with group revenue growth continuing on track for full year targets as parcels again made up for declines in letters.

For the nine months of the year to 24 December, the UK parcels, international and letters division saw flat revenue, as in the first half of the year.

Within this, growth in parcels volumes and revenues remained unchanged from the first half at 6% and 4%. Likewise, letters volumes were down 5% and revenues down 3%, which was better than had been expected.

The transformation of the UK business remains management's almost Sisyphean focus, with pensions talks having made progress during the third quarter and transformation costs are now expected to be around £130m for the full year, the bottom of previous guidance range, while the group is also on track to deliver around £190m of "costs avoided".

The smaller overseas business, GLS, showed improved growth in volumes and revenues of 10% in the nine-month period, up from 9% in the first six months.

Revenues grew in all GLS's main markets, with continued strong growth in Italy and good growth in Denmark and Eastern Europe.
In the US, the acquisitions of GSO and Postal Express were still being integrated.

GLS is facing cost pressures are being seen due to labour market conditions in many of GLS' European markets, as well as in the US, "which may slightly impact margins this year".

Chief executive Moya Greene felt it was a "good performance" over the group's most important period and now she expects to see broadly similar volume and revenue trends in UK parcels and letters for the full year, with GLS expected to see underlying revenue growth for the full year broadly in line with the first half.

"We have continued to make progress in talks with our unions on pay, pensions and the other issues under discussion. We have agreed the fundamental principles on some of the key issues and talks are ongoing to finalise these and other areas. We believe we can reach agreement on an affordable and sustainable pension solution and a pay deal that will enable us to continue to innovate and grow."

Royal Mail shares, having gained 25% since the start of November, fell in early trading on Thursday, down 1% to 462.7p just over an hour into the session.

The good Christmas performance was not hardly enough to persuade investors that anything materially has changed with regards the investment thesis, said analyst Neil Wilson at ETX Capital.

He said letter revenues were lower than expected, thanks largely to the snap election mailings earlier in the year, with Christmas cards ex-growth and the company's task being to manage the decline by cutting costs and keeping labour on side.

"RM remains highly cash generative and can afford to offer a progressive dividend that’s yielding circa 5%. But how long can that last? Declining letter volumes amid a broad switch to electronic communications at the corporate and government level, combined with rising labour costs, could start to leave it exposed. Shares are already up more than 20% from the November lows and these in-line results seem to be offering investors a chance to take profits,” Wilson said.

It was a "pleasingly uneventful" update, for Nicholas Hyett at Hargreaves Lansdown, as recent trends continued across the business of steady growth in business parcels, Christmas cards more resilient than feared. As for the international business, he said given the success of recent acquisitions he "wouldn’t be surprised if it remained an area of focus for spending".

He felt the £190m cost savings "should settle some nerves about a tense industrial relations environment slowing progress".