Royal Mail revenues flat as Christmas parcels offset letter decline

Dwindling volumes of letters to Father Christmas and other festive missives saw Royal Mail deliver flat revenues for the nine months to 25 December, with increased "business uncertainty" hitting volumes particularly in advertising and business mailings.

Although the GLS international parcel arm grew revenue 9% to offset a 2% drop in the larger UK Parcel, International and Letters (UKPIL) division, this mixed post bag meant group sales declined from the 1% growth in the first half.

This implied UKPIL revenue were down 3% underlying in the third quarter, representing a slight deterioration on the first half partly due to tough comparatives from the year before, while GLS appeared to have enjoyed 9% growth in the quarter.

Chief executive Moya Greene said Royal Mail's postmen and women had delivered 138m parcels in December alone and her 'cost avoidance' programme to reduce UKPIL costs by up to 1% over the year remained "on track".

Transformation costs are now expected to be £130m-£160m for the full year, having originally guided to £160m.

UKPIL's parcel revenues were up 3% with volumes up 2% across the nine months, but total letter revenue was down 5% with addressed letter volumes down by 6% if excluding elections, which implied third-quarter letter revenue fell 8% and quarterly parcel revenue rose 3%.

Greene said the outlook for UK letters and parcels trends and other guidance remained unchanged,

On 5 January, the FTSE 100 company began consulting with the active members of the Royal Mail Pension Plan and its trade unions about a proposal for the future of the plan from April 2018.

It said no decisions will be made until the consultation process is completed on 10 March 2017, when Royal Mail will write to members once it has made a decision.

RMG shares were the biggest FTSE100 underperformer on Thursday, down at least 6% to just above 420p in early trading.

Analyst Nicholas Hyett at Hargreaves Lansdown said that despite the flurry of festive greetings cards and increasing popularity of online shopping, the terminal decline of letters and increasingly crowded parcels industry was investors big worry.

"Not only have Amazon taken their operations in-house but Deutsche Post, the big boy of European parcels, has entered the UK through the acquisition of UK Mail. Combined with uncertainty around the health of the wider UK economy, which has resulted in steadily falling business mailings, this makes for a pretty unpleasant background in which to be doing business," he said.

"After years spent in public ownership Royal Mail believes it still has plenty of fat to trim, which should help support the bottom line in the near term. However, cost cuttings can’t continue forever and with much of the low hanging fruit already gone, arcane topics like the structure of the group’s pension scheme will attract increasing amounts of investor attention.”

Mike van Dulken at Accendo Markets noted that the share price fall broke rising support at 430p that dates back to October 2014's all-time lows as "the results do little to appease concerns".

"Parcels remains highly competitive the world over, in some cases intensifying as online shopping volumes climb, encouraging new carriers to fight for share. Current trends mean it’d take a brave soul to offer that 'things can only get better', hence cost efficiencies still such a big focus in order to protect margins."

Examining his technical analysis runes, van Dulken noted the shares were yet to test 2016 lows of 413p, but "today’s fall extends a falling channel from 525p last September, one with potential to deliver the shares back to aforementioned lows".