Royal Mail unravels to new low after Christmas parcels update

"Business uncertainty" is hitting letter volumes and Royal Mail expects larger than usual declines this year and next, despite processing 164m parcels over the Christmas period, up 10% over last year.

After troubles with productivity and efficiency led to a profit warning in October, management are continuing to work out what improvements are possible within the new long-term pay and pensions agreement struck with unions earlier last year. The findings of these reviews will be reflected in a new strategic plan, which is likely to be announced alongside full-year result in May, not before as had been indicated.

Cost pressures in the international parcels business, GLS, are also continuing to bite, with chief executive Rico Back flagging up slower volume growth as he protects profit margins.

For the full year, guidance for adjusted group operating profit before transformation costs was narrowed towards the lower end of the previous target, to £500-530m from £500-550m before.

Thanks to acquisitions, revenue growth increased in the third quarter, with growth of 2% after nine months of the year to 23 December, on the back of a 1% increase in the first half.

The UK parcels and letters business, known as UKPIL, reported revenues down 1%, the same as the first half, as parcels volumes and revenues both continued to grow at a rate of 6%. Addressed letter volumes declined 8%, worse than the 7% in the first half, with letter revenue down 6%.

Back said this decline largely reflecting the continuing impact of the GDPR data regulations and a relatively strong prior year comparative period in 2017.

GLS, the overseas parcels business, also saw revenue growth soften, to 8% from 9% in the first half as volumes slowed to 5% from 6%. However, add in the impact of acquisitions and revenue grew 13%.

Back, who was in charge of the GLS business before he was promoted to the top job last July, said GLS continues to see cost pressures, but that he is still targeting adjusted operating profit margins of over 6% for the full year. "We will continue to focus on margin protection and as a result we expect to see a slowing in the rate of GLS volume growth next year."

He also pencilled in a 7-8% decline in addressed letter volumes for the full year, and noting that "business uncertainty is impacting letter volumes" added that the next financial year is also likely to see letter volume declines outside Royal Mail's forecast medium-term range of 4-6%, excluding political parties' election mailings.

Royal Mail shares, having dived more than 40% since the 1 October update to just over 270p in early January but rallied in recent weeks, dropped to new low below 250p on Tuesday. By 0930 GMT there were down 9.5% to 272.1p.

Broker Liberum noted that while the UK parcels trends were in line with the first-half trend, UKPIL Letters and GLS appear to have deteriorated.

While management guidance was narrowed to the lower end of the previous range guiding, on lower addressed letters volumes for both this year and next, and slower growth at GLS, consensus for 2019 "is already there" but "we see March 2020 consensus at risk" as well.

UBS analysts felt the "relative stabilisation in RMG's performance is encouraging, given the problems of the past 12 months".

Ahead of the Capital Markets Day sometime after the results on 22 May, UBS added that the key question will be whether 2020 "is another year of margin squeeze and no catch-up on cost savings, or whether we will start to see a rebound and speeding-up of transformation".

Analysts at Hargreaves Lansdown said the continuing collapse in letter volumes is the big news in these numbers. "Royal Mail’s gone out of its way to say that’s down to wider uncertainty, and the introduction of new privacy laws under GDPR, rather an uptick in companies using email rather than paper. Whatever the cause, we suspect those mailings are gone for good."

They added: "News that the Capital Markets Day has been pushed back to after full year results suggests to us that the all-important cost savings may also be proving harder to deliver than hoped. Those efficiency gains remain central to the Royal Mail investment story, and if they can’t be delivered then there’s nothing to protect the group from the pains of an economic downturn in the UK. Those worries explain why the group currently offers a prospective yield of 8%, investors are nervous.”