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Broker view: Royal Mail

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As Royal Mail Group announces its second interim results since flotation, brokers give their views.

Darren Hepworth, director of global trading at TD Direct Investing

“It has been a year of changing fortunes for Royal Mail, following the initial speculative bubble – driven in part by the cries that the IPO had been undervalued. TD Customers benefited from the peak in price in early 2014 (618p, up almost 90% on list price) with sales making up 77% of all our trades. Since then the price has fluctuated, regularly dropping below the 400p mark. The settling of the competition case against its French parcel delivery firm, GLS, in October has provided a much needed boost, increasing share price by almost 20%.”

Graham Spooner, investment research analyst, The Share Centre.

“Royal Mail announced this morning a fall in its first half profits, however results were not as bad as feared. The group also warned that increasing competition from online retailer Amazon, among others, will hit its parcel delivery operations and will continue to pose a threat in the future. Despite this, management said that the company’s performance remains in line with expectations, although its full year results will depend on its performance over the Christmas period.
“We recommend Royal Mail as a ‘hold’ for income seeking investors. Potential longer term attractions remain and management has been improving performance and cutting costs. However, the market is focused on the threat of competition and falling volumes, so for the time being we suggest potential investors watch the situation from the side lines.”

Chris Beauchamp, market analyst, IG

The spectre of Amazon looms large in Royal Mail’s numbers today, casting a shadow over the numbers. A 6% decline in pre-tax profits to £218 million is one thing, but the warning about reduced parcels growth will send a winter chill down the spine of investors. The impression given from the statement is that Amazon is likely to become a permanent fixture in Royal Mail’s reporting, much like the weather (whether warm or cold) is for retailers.

Increases in operating profit margins will offer some comfort, while the boost in letter volumes will help too, even if this is partly influenced by election campaign volumes that won’t recur every year. However the statement finishes on a cautious note, admitting that Christmas will be the key determinant in overall performance. Christmas comes but once a year, so investors need to ask themselves if they really want to back a company that only really delivers good performance thanks to a six-week busy period?

Robin Speakman, analyst, Shore Capital

The group reports on a slightly more robust revenue performance across the group than we had anticipated this morning, but with slightly higher costs resulting in a lower operating result than we had pencilled in. Management retains guidance for the full year, however, and we note the business in seasonal in nature with the important Christmas season immediately ahead.

We had anticipated a flat revenue performance so growth of 2% to £4525m for the period to end September we believe is encouraging. UK Mail performed better than planned with the benefit of election mailings noted. GLS, European parcels also performed well in a tough market.

UK Parcels is clearly tough with a performance in both volumes and revenues that we believe to be below the underlying market performance; volumes grew by just 2% with revenues down 1% reflecting mix. Management expects that Amazon’s own parcels delivery service with impact the UK Parcel division performance by up to 2% per annum over the next two years or so (this already largely being factored into our forecasts).

For us, the focus is on cost management and thus cash generation. The underlying operating profit improvement for the H1 period is put at £13m, with reported being down c21% at 279m. Underlying costs in the UK, before transformation, were flat. An interim dividend of 6.7p is declared, 0.2p higher than our forecast. Noting that guidance remains unchanged for the full year we will consider our short term forecasts post the results meeting. We retain a BUY stance.

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