In recent years, Royal Mail (RMG) has been a two-sided story: letter volumes aren't holding up against digital innovation, but packages are proving resilient. As such, the parcel and international logistics systems (GLS) business is usually the bright spot, so any hint of weakness shouldn't be taken lightly. Although revenues from this division grew 9 per cent to £1.35bn during the first half, cost pressures drove margins down from 7.5 per cent to 5.7 per cent – far beyond the squeeze Berenberg analysts expected. Increased losses in France and the US aren't expected to recover any time soon either, prompting management to cut margin forecasts from more than 7.5 per cent previously to just above 6 per cent. And a £68m impairment charge taken against the division's US assets certainly didn't help matters.
An October profit warning meant these results contained few surprises, but that didn't stop lower UK revenues, poor productivity rates, fewer saved costs and pressure on GLS, leading to a drop in group adjusted operating profits of nearly a third to £190m. Indeed, a 0.2 per cent decline in UK productivity rates fell distinctly short of the 3 per cent improvement target set by management earlier this year. And while the company is still on track to claw back £100m-worth of costs by the year-end, this is also significantly short of the pre-warning goal of £230m.
Meanwhile, a 7 per cent fall in letter volumes exceeded the expected 4 to 6 per cent decline, and a 6 per cent improvement in UK parcel volumes failed to offset the damage. Divisional adjusted operating profits before transformation costs therefore fell by a third to £165m. This comes at a time when Royal Mail has agreed to let staff work fewer hours for more money to discourage future strike action.
Analysts at UBS expect earnings per share of 29p during the year to March 2019, compared with 44p in FY2018.
| ROYAL MAIL (RMG) | ||||
| ORD PRICE: | 330p | MARKET VALUE: | £3.3bn | |
| TOUCH: | 329-330p | 12-MONTH HIGH: | 633p | LOW: 322p |
| DIVIDEND YIELD: | 7.4% | PE RATIO: | 35 | |
| NET ASSET VALUE: | 424p* | NET DEBT: | 11% | |
| Half-year to 23 Sep | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2017 | 4.83 | 77 | 17.1 | 7.7 |
| 2018 | 4.93 | 33 | 0.5 | 8.0 |
| % change | +2 | -57 | -97 | +4 |
| Ex-div: | 06 Dec | |||
| Payment: | 16 Jan | |||
| *Includes intangible assets of £1.11bn, or 111p a share | ||||
