Parcels delivery service Royal Mail (RMG) delivered £260m in operating profit after transformation costs in the half year to 24 September which is ahead of consensus forecasts for £238m.

Despite the strong results, shares in Royal Mail have dipped 0.5% to 387p as investors focused on a weak performance and uncertain prospects for its UK arm.

Last month, we explained why we are still optimistic on the company’s prospects following a series of planned strikes.

Its overseas division GLS continues to perform strongly as sales were up 9% to £1,205m over the period, driven by volume growth in markets such as Germany, Italy and France.

UK DIVISION REMAINS TROUBLED

The UK business remains a sore spot for Royal Mail as revenue was flat at £3,624m although this is encouraging compared to a 2% decline last year.

Addressed letter volumes are down 5% excluding election mailings during the snap election earlier this year, which is within the full year forecast of a 4% to 6% decline.

Investors are also concerned about potential strikes over its essential Christmas period, which plays a significant role in full year performance as people generally send more letters and cards.

THREAT TO PARCEL VOLUMES ‘DIMINISHED’

Investec analyst Alex Paterson is encouraged by external mediation with the union over pay and pensions, implying that the ‘threat to parcel volumes over this key trading period has diminished.’

While he recognises that Royal Mail trades at a substantial discount to its European peers despite the opportunity for efficiency savings, he argues the stock is unlikely to perform until union issues are resolved.

The company currently trades on a forecast 9.6 times earnings per share in the year to 31 March 2018.

Cantor Fitzgerald’s Robin Byde flags Royal Mail’s attractive dividend yield, currently estimated at 6%.


Issue Date: 16 Nov 2017