Royal Mail posts confident interims as parcel and letter volumes improve

Underlying profits at Royal Mail improved in the first half of the year and it nudged its interim dividend higher, though the costs of transforming the business saw reported operating profits plummet more than 80%.

UK parcel volumes increased 6% and letter volumes declined 5% to leave the UKPIL business with revenues down 0.5% in the 26 weeks to 24 September, while the smaller overseas focused GLS business grew volumes and revenues 9%. This generated group revenue of £4.83bn, up 5% on last year or 2% on an underlying basis.

Ongoing cost cutting drove a 1% underlying reduction in adjusted UKPIL operating costs, before including transformation costs, which saw operating profit of £233m, down 6% on the same period last year.

Adjusted group operating profit after transformation costs increased 7% to £323m thanks to GLS profits increasing 23% to £90m, contributing 35% to the total profit. .

The adjusted group operating profit margin after transformation costs increased by 30 basis points to 5.4%. Underlying earnings per share rose 5% to 20.1p and and the interim dividend was increased by 4% to 7.7p.

Including transformation costs, reported operating profits plunged to £26m from £148m, with profit before tax down 30% to £77m.

Chief executive Moya Greene, who has been leading the transformation of the former state monopoly into what was a publicly traded FTSE 100 business until this summer, said after investing an average of around £590m net cash a year in the past three financial years, 2017-18 would see investment cut to around £450m.

"We had a good start to the year," she said, pointing to strong growth from GLS and UKPIL revenue "broadly unchanged" after a decline of 2% in the previous financial year, with investment in the business paying off with new UK parcels business wins and a "resilient" letters performance.

"Our performance for the full year, as always, will be dependent on the important Christmas period. We are opening six temporary parcel sort centres and recruiting over 20,000 staff. We are also extending opening hours at many of our Enquiry Offices to help retailers and consumers."

On the outlook, a letters decline of 4-6% is still expected for the medium term, while UKPIL cost avoidance is on track to deliver £190m in the full year.

While Royal Mail recently averted the threat of industrial action in the run up to Christmas, the dispute with its union over changes to the pension plan still lingers. Greene said her team was in external mediation with the Communication Workers Union. "Our priority is to reach agreement with the CWU to help underpin the sustainability of the business," she said.

RMG shares shot to near a three-month high above 400p in early trading, as results came in slightly ahead of market expectations, before falling back to 385p by 0930 GMT, a fall of 1% on the day.

Funds have been steadily building up short positions in the stock this year, noted Neil Wilson at ETX Capital, with about 3% now short versus close to 1% in January last year.

But with the shares down 22% for the last 12 months, there could be upside from a broadly positive outlook on GLS and parcels, he said.

Investec analyst Alex Paterson said the results were ahead of his forecasts on every line, though the dividend was in line.

"Royal Mail trades at a substantial discount to its European peers despite having a greater opportunity for efficiency savings," he said. "However, the stock is unlikely to perform until industrial relations improve and the dispute over pensions is resolved."

Broker Hargreaves Lansdown said with GLS and UK parcels businesses now accounting for almost 60% of total revenues the steady decline of letter revenues "should be becoming less and less of a headwind".

"Online shopping provides a steady tailwind to the parcels operations, and that has the potential to transform Royal Mail from staid former-public sector giant into a surprisingly modern growth story. However, new age competitors are far slicker operations than Royal Mail. The contrast between Amazon or even Ocado’s robotic warehouses and Royal Mail’s sorting offices is stark. If the group is to win in a highly competitive sector it needs to modernise, and at some pace."