Pressures to compete in a rapidly changing UK postal landscape has spurred Royal Mail (RMG) into spending big on modernising operations and streamlining its workforce. Strip out these transformation costs, which include the axing of 3,000 staff, and half-year operating profit fell 2 per cent to £342m.
While that was broadly in line with expectations, investors reacted to the latest update on the UK's national postal service's efficiency drive by sending the shares up 5 per cent. The company will have to spend at least £180m over the full financial year to achieve its target of knocking £500m of annualised costs by 2018. But progress is apparent: excluding the transformation spend, 2016 full-year underlying operating costs in the core business are expected to come in at least 1 per cent lower.
Plenty of capital will also be invested in automation and IT, helping to facilitate services such as same-day delivery and the option for customers to return unwanted products to e-retailers. The company's parcel unit has been identified as an area of future growth, but pricing pressures remain. While volumes climbed 4 per cent off initiatives in account parcels and a big rise in business from new and existing Parcelforce Worldwide customers, revenue rose just 1 per cent. Cut-throat competition was to blame, as rival carriers built new sorting hubs and expanded vehicle fleets to break into the lucrative online shopping market. Amazon, meanwhile, rolled out its own delivery network.
The letters operation fared even worse. Exclude the impact of election mailings and volumes fell 4 per cent, while revenue dipped 3 per cent despite the benefit of price increases. But given that this area is in structural decline, those figures were better than management had expected.
Fortunately, business at the smaller General Logistics Systems division was worth celebrating. Operating profit there rose 4 per cent to €72m (£51m), as revenue growth was achieved in all markets except Portugal. Growing volumes, plus planning and operational initiatives, helped offset the impact of minimum wage legislation in core market Germany. And revenue in Italy soared 15 per cent as disrupted competitors enabled Royal Mail to gobble up market share.
Broker Panmure Gordon expects adjusted EPS of 37.7p in the year to March 2016, down from 42.8p in FY2015.
| ROYAL MAIL (RMG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 473p | MARKET VALUE: | £4.7bn | |
| TOUCH: | 472.5-472.7p | 12-MONTH HIGH: | 533p | LOW: 389p |
| DIVIDEND YIELD: | 4.5% | PE RATIO: | 16 | |
| NET ASSET VALUE: | 387p | NET DEBT: | 10% | |
| Half-year to 27 Sep | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2014 | 4.48 | 167 | 12.5 | 6.7 |
| 2015 | 4.40 | 116 | 8.8 | 7.0 |
| % change | -2 | -31 | -30 | +4 |
Ex-div: 3 Dec Payment: 13 Jan | ||||
