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Royal Mail looks for salvation via cost-cutting

The postal service group was already struggling with high operating costs pre-pandemic
June 25, 2020

Royal Mail (RMG) produced £325m of adjusted operating profit in the year to 29 March, in the middle of its guided range, but this figure was 14 per cent lower than a year earlier amid higher distribution, conveyance and people costs in the ‘UK parcels, international and letters’ (UKPIL) business. As a result, the group margin contract to 3 per cent, from 3.6 per cent the prior year.

IC TIP: Sell at 168p

On a reported basis, UKPIL swung to a £140m operating loss, weighed down by £149m of exceptional charges. These include a £91m impairment on the Parcelforce Worldwide business and a £50m provision for a regulatory fine. UKPIL is expected to remain loss-making this year.

The Covid-19 pandemic has pushed up costs by £80m across April and May, driven by increased overtime and use of employment agencies. Royal Mail is now looking to make savings in its 2022 financial year, which will add £330m to operating profit, including £130m from 2,000 management-level job cuts. It will also reduce capital expenditure by £250m over the next two years.

Excluding lease liabilities, net debt improved to £46m, from £300m, and the group generated £635m of free cash flow, but nevertheless the final dividend has been scrapped.

Berenberg anticipates a £229m adjusted operating loss this year.

ROYAL MAIL (RMG)   
ORD PRICE:168pMARKET VALUE:£ 1.68bn
TOUCH:168-169p12-MONTH HIGH:259pLOW: 119p
DIVIDEND YIELD:4.5%PE RATIO:10
NET ASSET VALUE:562p*NET DEBT:21%**
Year to 31 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20169.326721.522.1
20179.833527.523.0
201810.221225.924.0
201910.624117.525.0
2020^10.818016.17.5
% change+2-25-8-70
Ex-div:na   
Payment:na   
*Includes intangible assets of £948m, or 95p a share, **Includes £1.2bn in lease liabilities, ^Year to 29 Mar