Stiff competition in the parcels space is being blamed for a 6.5% fall to 537.5p in Royal Mail (RMG) after the mail carrier's maiden full-year results following its October 2013 flotation.

Chief executive officer Moya Greene tells investors that Royal Mail is facing a couple of headwinds. 'The competitive environment on the parcels side is more intense,' she says, adding the group will be 'taking steps to remain the leader in this growing market'.

A 2% increase in overall revenues to £9.5 billion was offset by the fact that full-year like-for-like margin slipped to 4.2% in the 12 months to the end of March versus 4.4% a year earlier.

Unpacking the headline figures, UK Parcels, International and Letters (UKPIL), which comprises the company’s UK and international parcels and letters delivery businesses operating under the ‘Royal Mail’ and ‘Parcelforce Worldwide’ brands, saw a 2% rise in like-for-like sales to £7.8 billion. Parcel volumes flatlined compared with 2012-13. Although it achieve £309 million operating profit million after transformation costs, operating profit margins in this division decreased from 3.9% to 3.5% as a result of the provision for the management reorganisation programme.

On the letters front, direct delivery is the main concern, says analyst Gert Zonneveld of Panmure Gordon. 'Without regulatory action, RMG estimates (based on TNT Post UK’s publicly stated plans) that direct delivery could impact RMG’s revenues by over £200 million by 2017/18,' he warns.

One of the group's most recent initiatives in the letters space has been the launch of a pilot scheme which will see Royal Mail opening around 100 of its delivery offices across the UK on Sundays later this summer.

The group’s General Logistics Systems (GLS) business posted a 7% increase in revenues to £1.7 billion while volumes in the segment rose 6%. While this translated to an operating profit of £108 million, operating profit margin decreased from 6.7% to 6.5% due to the full-year effect of further increases in sub-contractor rates in Germany.

Despite the headwinds being faced by Royal Mail in both parcels and letters, Panmure maintains its 'hold' rating. 'We expect an element of regulatory intervention to protect RMG’s need to achieve a commercial return on its activities. Dividends are likely to rise, partly reflecting a likely rise in the payout ratio,' says Zonneveld.

Issue Date: 22 May 2014