Royal Mail posts strong first quarter as election pushes the envelope

Continued strong sales from Royal Mail's European parcels operation in the first quarter offset a decline from its UK business, though for the full year management kept cost and cash targets unchanged.

But despite continued business uncertainty in the UK, the FTSE 100 group's letters division performed better than expected, with Theresa May's snap election helping to push the envelope.

Letter volumes fell 6%, excluding the impact of political parties' election mailings though benefitted by around 1% from other mailings associated with the election, but total letter revenue was only down 4%, benefitting from higher than expected revenue associated with the UK political parties' election mailings.

The UK parcels business increased revenues 3% as volumes grew 5% thanks to a 5% jump in parcel volumes, with growth driven by a good performance in Royal Mail account parcels where new contracts were won and more traffic was received from existing customers, particularly in tracked mail.

Putting the UK parcels and the letters together, the UK business, UKPIL, saw revenues fall 1%.

The saving grace, GLS, performed strongly with revenues up 6% and volumes 5%, with growth achieved in all its main markets, with strong growth in many markets, including Italy.

Excluding the impact of Easter and other European public holidays, underlying volume and revenue movements would have been around 4 percentage points higher, and including recent acquisitions and on a constant currency basis, GLS revenue was up around 18%.

Chief executive Moya Greene said: "GLS continues to be a driving force for the Group. Its ongoing, focussed international expansion is increasing our geographic diversification, scale and reach.

"In UK parcels, our quality of service and improved product offerings are driving high levels of customer satisfaction and attracting new customers and higher volumes. Our performance in letters was better than we expected, despite continued business uncertainty in the UK.

"We remain on track to deliver our cost avoidance and net cash investment targets for the full year."

Shares in Royal Mail were up more than 3% to above 411p on Tuesday morning after the announcement.

Analyst Neil Wilson at ETX Capital noted the stock remains a full third off its 2014 peak and a fifth below where it was a year ago as "a sign of just how much Brexit uncertainty is weighing on the domestic market".

He said the company is at the mercy of the shifting trends in letters and parcels, with people sending fewer letters but online shopping driving parcel demand – the Amazon effect that is proving so destructive for high street retailers.

"Economic uncertainty continues to weigh on letter volumes and could also hit parcels if consumers start to rein in their spending. With relatively high fixed costs Royal Mail’s parcel business may not be best placed to weather a pullback in volumes."

Nicholas Hyett at broker Hargreaves Lansdown said the company was one of the few clear winners of last month’s general election and that UK parcels also looked like it is "turning a corner" with steady volume growth, albeit at lower prices than previously.

"However, increasingly it’s the international business which will be driving growth long term. The division put in another respectable performance this quarter, with recent acquisitions increasing its importance to the overall business. Wrangling over the new pension scheme continues behind the scenes, and will remain a source of uncertainty until the large CWU union is on side."