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Royal Mail's turnaround tale lacks credibility

The UK's postal service has announced a five-year £1.8bn turnaround plan, where parcels will make up for continuing letter declines
May 22, 2019

Royal Mail (RMG) has a familiar plan to restore its fortunes: deliver more parcels. Management hopes this will boost its adjusted operating profit margin to at least 4 per cent by 2021-22, increasing to over 5 per cent by 2023-24. However, the turnaround plan – which is expected to cost £1.8bn over five years – has come at the expense of the shares' income case, with management cutting the dividend to 15p a share for 2020.

IC TIP: Sell at 224p

That extra cash will go into 1,400 parcel postboxes and a plan to allow people to send back parcels from their front door, among other initiatives. Chief executive Rico Back said there would be some shareholder pain while the changes come in. “The investment in the UK, and expected lower cash flow in the early years, means we are rebasing the dividend and changing our dividend policy,” he said.

The plans were well-received by investors, however, pushing Royal Mail’s share price up 6 per cent, or nine times forward earnings. That was despite the continued decline in addressed letter volumes, down 8 per cent year on year, which management attributed to the introduction of General Data Protection Regulations (GDPR), as well as general business malaise.

ROYAL MAIL (RMG)   
ORD PRICE:224pMARKET VALUE:£2.24bn
TOUCH:223.9-224.1p12-MONTH HIGH:560pLOW: 206p
DIVIDEND YIELD:11.2%PE RATIO:13
NET ASSET VALUE:462p*NET DEBT:6.5%
Year to 31 MarTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
20159.30.4032.521.0
20169.30.2721.522.1
20179.833527.523.0
201810.221225.924.0
201910.624117.525.0
% change+4+14-32+4
Ex-div:25 Jul   
Payment:4 Sep   
*Includes intangible assets of £1.01bn, or 101p a share