When Rico Back took over from Moya Greene as chief executive of Royal Mail (RMG) in June, he was faced with a company navigating structural change in its industry. Productivity improvements were meant to compensate for rising costs, but so far to little avail. During the first half productivity improved by 0.1 per cent, making the 3 per cent goal by the year-end look unrealistic. As a result, the cost savings target was reduced from £230m to £100m.
Management warned that full-year adjusted operating profits are now expected to fall between £500m and £550m, compared with analysts’ previous expectations of around £654m. Analysts at Liberum think this translates into a 30 per cent cut to EPS for the current year, with cuts of around 38 per cent in both FY2020 and FY2021. Letter volumes fell by 7 per cent and are expected to decline at a similar rate in the second half.
Analysts have also called into question the sustainability of dividend payments – equivalent to a 6.1 per cent historic yield at the current price of 368p. Liberum said payments look barely covered by earnings and cash flow this year, and underlying cover deteriorating in later years with the dividend “highly vulnerable” to tough trading. Dividend cover of one times is “wholly inadequate” for a business with limited earnings visibility.
