Royal Mail delivers flat sales and profits in first half

Royal Mail failed to deliver revenue growth in the first half as UK and European parcel growth was offset by letters weakness, though the intense focus on costs saw adjusted operating profits also remain flat.

Revenue of £4.4bn was in line with forecasts but while operating costs were flat, adjusted profit before tax fell 16.4% to £240m.

Reported pre-tax profits sank 30% to £116m due to redundancy costs from the net departure of nearly 3,000 staff in the half. Adjusted earnings per share fell 16.6% to 18.1p, missing the average estimate of 20p, and an interim dividend of 7.0p per share was declared.

The redundancies, which included a middle-management reshuffle, led to a 1% fall in people costs, helped by better productivity and only partly offset by an improved pay offer, while non-people costs fell 2%.

The core international parcel and letter delivery businesses, UKPIL, saw revenue fall 1% to £284m as addressed letter volumes declined 4%.

The Europe-focused GLS parcel delivery arm lifted sales 8% to £52m on volume growth of 9% but this improvement was more than offset by an increase in costs.

"We delivered parcel volume and revenue growth in the UK, which continues to be a challenging market," said chief executive Moya Greene.

"Addressed letter volume decline was at the better end of our forecast range. We are driving through a range of product innovations and service improvements at pace, as well as targeting new areas of growth and enhancing our offering."

She added that the outlook for UK letter and parcel trends over the medium and short term remained unchanged, while she now expected underlying operating costs in UKPIL, excluding transformation costs, to be down by at least 1% in the current financial year.

But transformation costs are expected to be higher, at least £180m compared to the £120-140m guidance given in May.

But on the upside, given the performance in the first half, directors now expect the GLS operating profit margin decline to be at the better end of the 50-100 basis points range in 2015-16.

"As in previous years, the full year outcome will be dependent on our important Christmas period, for which we have extensive preparations in place."

Analyst Richard Hunter at Hargreaves Lansdown pointed out that the numbers put "even more emphasis than usual" on the critical Christmas period.

He added: "The spectre of the Ofcom review remains a drag on prospects, whilst the ominous presence of Amazon also injects caution. More positively, the fact that the company is accelerating the transformation should be reflected further down the line in a leaner business, whilst its ability to generate cash has enabled a further increase to the dividend, where the projected yield of 4.8% is attractive in the current interest rate environment."

Ipek Ozkardeskaya at London Capital Group was cautious on future profitability "as Ofcom has said it will re-examine and may roll back some of commercial flexibility given to Royal Mail in 2012, as fixing higher prices, which may directly impact earnings and dent the investor appetite".

She noted that the share price opened above the 200-day moving average of 470p and that Royal Mail was "putting on solid armour to deal with the inevitable decline in letter volumes".

Broker Panmure Gordon said underlying profits were broadly in line with expectations and that the share should be supported by the attractive dividend yield.

"With limited revenue growth potential in the near term, it’s down to ongoing cost control to improve earnings. The company’s financial position is good, with relatively limited net debt."

RMG shares were one of the leading risers on Thursday, up 6.1% at 481.66p by 1010 GMT.