‘Uphill struggle’ predicted for Royal Mail, as profits and share prices fall

Royal Mail’s domestic business could be loss-making within a year, its CEO has warned, after latest trading results showed a sharp fall in profits.

The company’s overall revenues rose by 5.1% in the first half of 2019 to £5.2bn, and although much of this increase was driven by international business, Royal Mail’s UK arm delivered its strongest result in five years too.

Letter revenues – despite dropping 1.4% – were Royal Mail’s strongest during that period, but this decline was ‘more than offset’ by a 5.6% growth in parcel revenue.

However, figures which look strong on the surface were undermined by increasing costs in the UK, including a service transformation project which Group Chief Executive Officer Rico Back admits is ‘behind schedule’.

As a result, the group announced an adjusted group operating profit of £165m – down 13.2% – and an interim dividend of 7.5p, a year-on-year reduction of 6.3% year-on-year.

Share prices plunged 11.3% in early trading.

Mr Back also predicted further declines in letter revenue of 7-9% in the next 12 months, and 6-8% the year after.

He said: “Our profitability performance is in line with our expectations for the half year, despite considerable UK economic and political uncertainty.

“The UK letter revenue performance in the first half is our best for five years. It will also benefit from the General Election in the second half. But the outlook, excluding elections, for the letters business in the UK is challenging.

“Our transformation is behind schedule. We are investing more because of the industrial relations environment, the General Election and Christmas, to underpin our quality of service at this key time.

“This is likely to impact our productivity for the remainder of the year. When combined, revenue and cost headwinds could possibly result in a break-even or loss-making position for the UK business in 2020-21.

“People are posting fewer letters and receiving more parcels. We have to adapt to that change. The challenging financial outlook in the UK means now, more than ever before, we need to make the changes required – and accelerate them – to ensure a successful UK business.

“We remain committed to investing £1.8 billion in our transformation. We want to change, working with our unions, but we can only do so through an affordable resolution. We have changed many times before. We will do it again.”

However, Equity Analyst Nicholas Hyett, of Hargreaves Lansdown, not only described this year’s performance as ‘poor’, he also warned the future outlook is ‘even gloomier’.

He said: “We’ve always known Royal Mail faced an uphill struggle, as people and businesses send fewer and fewer letters and delivery companies jostle for position in the growing parcel business. Unfortunately the group’s key weapon against those headwinds seems to have misfired badly.

“Royal Mail’s investment case always rested heavily on the argument that years of public ownership had left the group bloated, underinvested and with lots of low hanging efficiency savings to harvest.

“Well that may have been true up to a point, but any low hanging fruit is long gone, and a heavily-unionised workforce is making future cost savings difficult, if not impossible, to deliver.

“The combination of falling revenues and stubbornly high costs is stamping out the group’s profit margins.

“There’s better news from the international business. A few years ago we would have described this unit as small; but impressive growth, acquisitions and a struggling UK operation means it accounted for the majority of profits this half.

“With UK profits potentially falling into negative territory next year, investors in the UK’s posties look set to find themselves more reliant on international mail to deliver the group’s new dividend policy than they might like.”