Shares in recently privatised Royal Mail (RMG) have dropped 7 per cent since we advised offloading stock last week. But the company continues to cause controversy. The national media have re-ignited the debate over whether the company was significantly undervalued when it was floated on the London Stock Exchange last year.
Royal Mail's share price is clearly undergoing a correction, having inflated to more than 600p a share at the start of the year. Investors are sensing the future of Royal Mail is unclear and that stripping out costs from its existing businesses will be crucial for success.
What puts Royal Mail's struggles into perspective is recent news from competitor group UK Mail (UKM), which announced a 15 per cent rise in parcel volumes in the final quarter of 2013 alone. Compare this to Royal Mail, which reported stagnant parcel volumes despite driving more than half its top-line revenues from the division. The online shopping boom has helped all mail carriers capitalise on parcels business, but Royal Mail is failing to increase its market share.
Lifting prices to offset squeezed margins negatively impacted volumes, but Royal Mail will now be forced to turn to alternative cost-cutting methods if volumes are to recover. This includes the closure of key depots and further job cuts - which will inevitably incite fresh union clashes.
Another surprise is UK Mail's growth in its more traditional mail service. Royal Mail has long lamented the decline of its traditional letters business, reporting a 3 per cent fall in revenues and a 5 per cent squeeze in volumes over the Christmas trading period. By contrast, UK Mail claims its letters revenues and volumes numbers are up, largely as a result of strong client retention and new business wins. While no figures have been disclosed yet, UK Mail chief executive Guy Buswell said a top priority was making sure the parcels and mail business remain closely integrated, therefore keeping costs spread evenly.
Of course, what helps set companies such as UK Mail and DX Group (DX) apart from Royal Mail is a diverse service offering. Freight, courier and logistics services help insulate Royal Mail's peers from a decline in more traditional services. Even more telling is the fact that UK Mail, with a comparatively small market capitalisation of £345m, musters almost the same dividend yield for investors as its behemoth competitor.
