Royal Mail shares tank after interim numbers fail to inspire

Added 17th November 2016

Markets were unimpressed by Royal Mail’s second consecutive quarter of meagre sales growth, dragging its shares down by 6.4% to 467.2p on Thursday morning.

Royal Mail shares tank after interim numbers fail to inspire

The British postal service company was the worst performing stock of the FTSE 100 Thursday morning, but the index was still up 0.3% at 6,770.

Royal Mail’s group revenue increased by a modest 1% to £4.6bn, on an underlying basis, which chief executive Moya Greene said was “broadly in line with our expectations.” The quarter before, total sales growth was also only 1% higher during what the group said was a “traditionally quieter period for the business.”

The group’s UK Parcels, International & Letters (UKPIL) division likewise reported a second successive period of waning sales, as addressed letter volumes continued to decline. With total letter revenue 3% weaker, the UKPIL only generated £3.6bn compared with £3.7bn the year before. Before transformation costs, profits from UKPIL were £247m, a 14.8% decrease from last year’s figure.

Total pre-tax profits also fell from £342m to £320m over the first half.

Royal Mail’s continued sluggish sales growth comes at a time when the group is making drastic transformational cuts to reduce operating costs, including trimming UKPIL costs by 1%. Greene confirmed that the group had increased its cost avoidance target from £500m to £600m of annualised costs cumulative over the three financial years ending 2017-2018.

And the group said it expects to reduce its net cash investment to £500m per annum, as opposed to the £615m it has spent on average for the past three years.

The Pan-European General Logistics System, which acquired Spanish express parcels delivery company, ASM, and California’s Golden State Overnight this year, remained the one bright spot in Thursday’s update. Revenue in the business grew by 9% (£942m), cancelling the setbacks from UKPIL’s lacklustre performance. Operating profit was also up 25% (£73m) and volumes were 10% higher.

The Share Centre’s investment research analyst Graham Spooner agreed that “there was little for investors to get excited about from this update,” but stressed that as ever “the full year performance will weigh heavily upon the Christmas period.”

“There remains a divergence of opinion amongst analysts as to the prospects for the group, and at present, we currently recommend Royal Mail as a ‘hold’ for medium risk investors,” he said. “Income seekers may be attracted but for the time being the market appears to be focussed on the growing threat of competition and falling letter volumes, so we would suggest potential investors watch the situation closely.”

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