Parcels delivery firm Royal Mail (RMG) is potentially on the cusp a significant breakthrough on pay and pension issues and could avoid strike action over the crucial Christmas period. Shares are up 0.8% to 424p in response.

In October, we flagged Royal Mail as the ultimate contrarian play despite a series of problems that are dogging its performance.

The company has been threatened with strike action due to staff discontent over pay, pensions and conditions.

After the market closed on Wednesday, Royal Mail released a number of recommendations from a mediator.

Key proposals that could end the dispute include a 2% hike in base pay from April 2018 and a suggested commitment to a collective defined contribution pension scheme with a defined benefit element.

Royal Mail is also considering a one-hour reduction in the working week to 38 hours, on the condition the Communication Workers Union sign up to efficiency initiatives, including delivery method trials.

PRODUCTIVITY GROWTH COULD OFFSET PAY HIKE

Investec analyst Alex Paterson says it is difficult to quantify the impact, but believes higher productivity growth should offset pay increases.

He comments that Royal Mail has the lowest margin of listed European mail operators, suggesting significant potential for margin expansion through initiatives such as parcels automation.

UBS analyst Dominic Edridge warns one of the key issues to overcome is whether the union and company can work together, which has been an issue over the last two years.

If Royal Mail can successfully complete its efficiency initiatives including later delivery times, this could potentially boost revenue by £45m and cut costs by £20m, says Edridge.


Issue Date: 07 Dec 2017