Royal Mail posts poor first-quarter numbers

Royal Mail (RMG) has failed to deliver meaningful growth for investors once again. The parcels division struggled to offset the decline in the traditional letters business during the first quarter of the financial year, as the British postal carrier faces growing pressure from competition and operational inefficiency.

Parcel volumes for the three months to the end of June rose just 1 per cent, with revenues marginally down, while letter volumes dropped a further 3 per cent. Letter revenues, on the other hand, were up 3 per cent, thanks to price increases and a boost from the European and local elections.

The 3 per cent volume decline in letters actually beat market forecasts, which were based on company guidance of a 4-6 per cent fall. But the results didn’t prompt analysts to upgrade their expectations for the letters business this year.

Royal Mail has already warned that rising competition threatens the company’s future. It lodged a formal complaint with Ofcom in June, claiming the postal service is under threat from multiple delivery specialists in densely-populated urban areas. High levels of competition are expected to drive down parcel revenues for the coming year, but Royal Mail said it hoped to offset the impact on profits with tight cost control.

In the meantime, the group will attempt to fend off an anti-competition investigation brought against it in France. Its parcels subsidiary faces a hefty fine if found guilty of anti-trust violations in the country.

John Lawson at Investec says…

Hold. Investors will immediately latch onto comments about the parcels business and intensifying competition, which is not good news. But the letters business is performing ahead of expectations and costs are also lower than expected. The group still believes it will meet its full-year targets – assuming no further weakening in the UK parcels market – but Christmas trading will prove crucial. There are a lot of moving parts, with unfavourable regulation posing yet another threat. Put simply, the first quarter was a mixed bag. We expect pre-tax profits of £462m this year, giving EPS of 34.1p.

Matthew O’Keefe at Berenberg says…

Buy. It is clear the company is hugely inefficient in both operational and financial terms. But Royal Mail could improve results over the next few years if it took forceful steps to improve efficiency and better allocate its capital. In fact, we believe the company could be in a net cash position by 2016, which raises the possibility of share buybacks, special dividends or a bigger ordinary dividend. In our view, Royal Mail bears all the hallmarks of a classic UK privatisation. Despite being sold on the cheap last year, the shares still look a bargain in comparison to peers.