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Royal Mail stakes its future on parcel boom

The group is assessing what aspects of the lockdown trading environment have become hard-wired
Royal Mail stakes its future on parcel boom
  • Domestic parcel volumes remain above pre-pandemic levels
  • Intensifying inflationary pressures could weigh on performance

Whether the world will ever return to a state of pre-Covid normality is a matter of ongoing debate. Some habits formed in lockdown certainly appear harder to break than others. At the end of last month, UK offices were at around a quarter of their capacity, suggesting that a shift toward greater home working could be permanent. This is potentially bad news for city centre retailers and cafes – but could be a continued blessing for online shops and courier services.  

In its latest full-year result, Royal Mail (RMG) reported that domestic parcel volumes were still up some 31 per cent on pre-pandemic levels. However, the company faced tougher comparatives this time around, meaning statutory profits are now in decline year on year. Revenue for its Royal Mail brand was down 1.6 per cent owing to changing consumer behaviour after the easing of lockdown restrictions. 

As a whole, RMG did manage a marginal revenue uptick, thanks largely to a 4.4 per cent increase in revenue at its Amsterdam-headquartered subsidiary, GLS. In a statement, the company’s chief executive, Simon Thompson, said that the company’s future is as a parcels business. Therefore, he stated it needs to “adapt old ways of working designed for letters” and move much more quickly “in a world increasingly dominated by parcels”. 

To this end, RMG has announced a future investment of £350mn in hubs, technology advancements and parcel processing solutions – calling this change agenda “urgent” especially in light of broader economic headwinds. Rising fuel prices and other escalating inflationary pressures will no doubt hit all of RMG’s businesses, as will material minimum wage increases. The impact of the latter will primarily be felt in countries such as Germany, one of GLS’s key markets. 

“The board anticipates decreased revenue in 2022-23,” noted Neil Shah, director of research at Edison Group. “For investors, it will be a case of keeping a close eye on the group’s broader strategic plans, to see if this trend can be bucked in the long term".

To one degree or another, all parcel delivery firms are grappling with a pair of conflicting trends: sustained post-pandemic demand for their services and the increased cost of doing business. Royal Mail, which is at the beginning of its modernisation drive and is in the midst of a pay dispute with its largest union, may find this juncture more turbulent than some of its peers. A lowly forward PE multiple of six times consensus earnings and the extravagant dividend yield on offer reflect associated market anxieties. RMG remains a work in progress, albeit one that's been around since 1516. Hold.

Last IC View: Hold, 460p, 18 Nov 2021

ROYAL MAIL (RMG)    
ORD PRICE:299pMARKET VALUE:£ 2.86bn
TOUCH:299-299.4p12-MONTH HIGH:590pLOW: 316p
DIVIDEND YIELD:6.7%PE RATIO:5
NET ASSET VALUE:56p*NET DEBT:116%
Year to 31 MarTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
201810.221225.924.0
201910.624117.525.0
202010.818016.17.5
202112.672662.010.0
202212.766261.720.0
% change+1-9-0.5+100
Ex-div:28 Jul   
Payment:06 Sep   
*Includes intangible assets of £916mn, or 96p a share