Shareholders in Royal Mail (RMG) can take encouragement from strong operational progress over the past year or so. But the bottom line is that the privatised postal provider remains hamstrung by its statutory obligation to provide universal postal coverage across the UK.
The group pointed to increased competition by way of explanation for lower-than-expected revenue from its key UK parcels business in 2014-15. Revenues at UKPIL - UK Parcels, International and Letters - were broadly flat on last year, with a marginal increase in the UK parcel business offsetting a decline in letters. The latter is in structural decline due to the growth of email traffic.
If you discount the effects of a large one-off gain on the pension fund in 2013-14, then group pre-tax profits were up by over a third to £569m. Much of the improvement can be attributed to lower finance costs, which more than halved. This reflects a steep fall in net debt - down from £555m to £275m - as free cash-flow surged following the sale of Royal Mail's Paddington site.
Restructuring costs - or 'transformation' costs, as management calls them - also contracted significantly, even though the group cut more than 5,500 jobs at its parcels unit over the period. The focus on reducing costs is also reflected in a 'management reorganisation' initiative, announced in March 2014, which is expected to deliver £80m of annual savings from the current financial year onwards.
Although Royal Mail's European parcel delivery service, GLS, performed well over the period, margins could come under further pressure due to beefed-up German minimum wage regulations. Still, recent events have worked in Royal Mail's favour. For a start, one of its key competitors, Whistl (formerly known as TNT Post) suspended End-to-End (E2E) deliveries in London, Liverpool and Manchester. That decision, which is highly favourable for Royal Mail, came after a division of Lloyds Banking (LLOY) opted not to proceed with a funding agreement for the expansion of Whistl’s E2E operations. Later this year Ofcom is due to report on a competition complaint made by Whistl against Royal Mail. If the group is found guilty of anti-competitive practices, the regulator could impose a fine equivalent to 10 per cent of annual turnover.
Brokerage Panmure Gordon expects EPS of 33.3p, against 32.5p in 2014-15.
| ROYAL MAIL GROUP (RMG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 490p | MARKET VALUE: | £4.9bn | |
| TOUCH: | 490-492p | 12-MONTH HIGH: | 575p | LOW: 388p |
| DIVIDEND YIELD: | 4.3% | PE RATIO: | 15 | |
| NET ASSET VALUE: | 384p | NET DEBT: | 7% | |
| Year to 30 Mar | Turnover (£bn) | Pre-tax profit (£bn) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2013 (53 weeks) | 9.30 | 0.35 | 59.4 | nil |
| 2014 (restated) | 9.36 | 1.66 | 128 | 13.3 |
| 2015 | 9.33 | 0.35 | 32.5 | 21.0 |
| % change | -0.3 | -79 | -75 | +58 |
Ex-div: 2 Jul Payment: 31 Jul | ||||
