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Competition undermines Royal Mail

A year on from the controversial listing of Royal Mail, the nation's best-known postal service is still struggling to find its rhythm.
November 19, 2014

Just over a year after its controversial float on the London Stock Exchange, Royal Mail (RMG) is still struggling to find its place in a deregulated world. The share price peaked at 618p at the start of the year, but has since floundered, and fell a further 8 per cent on the morning these interim figures were released.

IC TIP: Sell at 448p

It was another difficult trading period for the nation’s best-known postal service. A better-than-expected performance from the letters division was encouraging - revenues grew 1 per cent to £2.24bn - but this was down to the timing of local elections and postal votes. Traditional addressed letters saw volumes dip 3 per cent.

Parcels didn’t fare much better. Volumes rose 2 per cent, but chief executive Moya Greene blamed a 1 per cent decline in revenue on growing competition - particularly from Amazon, which decided to operate its own delivery network. Ms Greene said the loss of Royal Mail's key customer would reduce the growth rate of the addressable UK market to roughly 1-2 per cent over the next two years.

During the first half, the decline in parcels revenues was offset by the increase in letters, leaving sales for the UK division flat overall. Royal Mail has hoped to boost business by raising prices, but some of its January 2014 changes have been suspended until Ofcom concludes its investigation into market competition.

Cost control is Royal Mail’s other lifeline, and operating costs last year were flat (before so-called "transformation costs", which include redundancy packages). Tensions with frontline staff resulted in pay increases, but these were offset by savings elsewhere. Royal Mail was also forced to make an £18m provision for its settlement with the French competition authority. Net debt rose by £15m to £570m over the six months.

Despite the poor showing, management says it still hopes to meet market expectations for the full year. But the Christmas trading period is crucial: Royal Mail admits its performance will depend on a successful festive season and a watchful eye on costs. Analysts at Investec expect adjusted pre-tax profits of £443m for the current financial year, giving EPS of 32.7p - up from £363m and 26.3p respectively.

ROYAL MAIL (RMG)
ORD PRICE:448pMARKET VALUE:£4.48bn
TOUCH:447-448p12-MONTH HIGH:618pLOW: 388p
DIVIDEND YIELD:4.5%PE RATIO:25
NET ASSET VALUE:274pNET DEBT:21%

Half-year to 30 SepTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
20134.521.6122.0nil
20144.530.212.56.7
% change--89-90-

Ex-div: 27 Nov

Payment: 14 Jan