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Royal Mail profits slump despite parcel boom

Parcel growth pushed revenue higher during the first half but that was offset by higher costs
Royal Mail profits slump despite parcel boom
  • A surge in online shopping meant UK parcel revenue exceeded that from letters for the first time
  • Yet the group was weighed down by manual sorting costs and expenses relating to Covid-19
IC TIP: Sell at 308p

As consumers have flocked to online shopping during the pandemic, the demand for parcel delivery has boosted Royal Mail (RMG). Offsetting the ongoing decline in letters, revenue from its domestic business rose by 5 per cent in the six months to 27 September to £3.8bn. Parcel revenue exceeded that from letters for the first time, accounting for 60 per cent of the UK total versus 47 per cent a year earlier.

Despite the parcels boom, the UK business swung to a £129m adjusted operating loss versus a £75m profit a year earlier. Only a third of parcels are sorted by machines, so manual sorting of additional volumes pushed up costs by £95m. There was also £85m of Covid-19-related expenses on top of extra international conveyance and redundancy costs.

International momentum did see the group post an overall adjusted operating profit of £37m. However, throw in pension charges and asset impairments, and Royal Mail fell to a £20m statutory operating loss, down from a £61m profit last year.

Thanks to Christmas, revenue is expected to increase in the third quarter, but costs will also rise as the group has hired 33,000 temporary workers to handle peak volumes. It has also warned of uncertainty in the fourth quarter amid changes to international postal rates and Brexit. Analysts anticipate an adjusted operating profit of £102m for the full year, down from £217m a year earlier.

The shares have been gaining momentum and short interest has dropped from around a tenth of the issued share capital to 1 per cent. But in interim executive chair Keith Williams’ own words, Royal Mail needs to “speed up the pace of change in order to create a profitable business in the UK”. Capitalising on the long-term structural shift to parcels will require further automation and a seven-day delivery service to keep pace with rivals. The track record of union opposition does not inspire much confidence. Sell.  

ROYAL MAIL (RMG)   
ORD PRICE:308pMARKET VALUE:£ 3.1bn
TOUCH:307-6-308p12-MONTH HIGH:312pLOW: 119p
DIVIDEND YIELD:NILPE RATIO:140
NET ASSET VALUE:484p*NET DEBT:21%
Half-year to 27 SepTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20195.1717315.37.5
20205.67171.4nil
% change+10-90-91-
Ex-div:na   
Payment:na   
*Includes £925m in intangible assets or 93p a share

Last IC View: Sell, 184p, 23 Jul 2020