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Royal Mail battling on pensions

Royal Mail battling on pensions

As if the threat of industrial action and the challenge of making money from falling letter volumes weren't enough, now Royal Mail (RMG) is faced with the prospect of re-nationalisation if voters elect the Labour party at the upcoming general election. The party's manifesto has promised to reverse the company's privatisation "at the earliest opportunity". The polls - for what they're worth - suggest it won't happen, but you could certainly argue that the executive team is still struggling with legacy issues from an essentially flawed privatisation process.

Other privatised utilities have been stigmatised by the failure of government and regulators to construct an effective market mechanism. Royal Mail, on the other hand, is charter-bound to provide services to unprofitable corners of the UK within a pre-determined pricing structure, while its competition is free to do as it chooses.

It's difficult enough operating in the logistics industry due to the expansion of digital communications, but tougher still when you're not on a level playing field. So investors can take heart from a creditable operating performance in the year through to March 2017. Underlying revenues were up marginally, with a 2 per cent decrease in the UK parcels and letters business, UKPIL, offset by a 9 per cent increase in its Europe-wide parcels arm, General Logistics Systems (GLS). The latter entity, particularly in the business-to-consumer (B2C) space, remains central to Royal Mail's growth plans.

The group has kept a lid on costs, or at least those within its influence. Operating costs were broadly flat and management is on track to "avoid around £600m of annualised costs in UKPIL by 2017/18". The group has passed the peak investment phase, with net cash investments of £492m down from £656m in 2015-16. The annual bill for the transformation programme came in at the lower end of guidance at £137m, against £191m a year earlier. Nevertheless, the challenges faced by management are reflected in the 6 per cent decline in adjusted operating profits (pre-transformation costs) to £712m, as UKPIL weakened.

Prior to these figures, JPMorgan Cazenove gave adjusted profits of £531m for the March 2018 year-end, with EPS of 38.5p, against £547m and 39.8p in FY2017.

ROYAL MAIL GROUP (RMG)
ORD PRICE:444pMARKET VALUE:£4.44bn
TOUCH:444-444.6p12-MONTH HIGH:549pLOW: 397p
DIVIDEND YIELD:5.2%PE RATIO:16
NET ASSET VALUE:500pNET DEBT:7%

Year to 26 MarTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
2013 (53 weeks)9.300.3559.4nil
20149.361.6612813.3
20159.330.4032.521.0
20169.250.2721.522.1
20179.780.3427.523.0
% change+6+25+28+4

Ex-div: 29 Jun

Payment: 28 Jul

IC VIEW:

A decent performance, but attention now turns to talks with postal workers designed to avoid the group's first nationwide strike since privatisation, after management took the decision to close the legacy pension fund to future accrual at the end of March next year. We remain neutral ahead of developments. Hold.

Last IC View: Hold, 470p, 21 Nov 2016

visible-status-Standard story-url-Royal Mail_Results_180517.xml

By Mark Robinson,
19 May 2017

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