Broker views: Royal Mail struggles to deliver growth
Richard Hunter, Head of Equities at Hargreaves Lansdown Stockbrokers
“It appears that the honeymoon period is over for Royal Mail as the realities of its competitive environment intensify. The weakness in the parcels performance is a concern, and may prompt questions as to whether this is transient, or whether the change is structural. The fact that this decline has been offset by an improvement in the letters business, which is not a long term area of growth, and cost cutting measures, may help in the shorter term, but these are both temporary reliefs. This is quite apart from the previously flagged doubts about the Universal Service, the Ofcom investigation and more recently the antitrust probe in France. More positively, the GLS division continues to make a decent contribution, net debt is being reduced and the ongoing growth in online retailing should at least provide the group with the opportunity to consolidate its position.
“The shares remain 41% ahead of the float price, but 24% lower than the closing high which was achieved in mid-January. Despite this air having been let out of the tyres, there are some lingering questions over the immediate prospects for Royal Mail and the market consensus of the shares as a hold reflects this position.”
Graham Spooner, investment research analyst at The Share Centre
“This morning’s trading update revealed a mixed bag of fortunes for Royal Mail. Investors will be concerned to see parcel deliveries, which account for the largest part of Royal Mai’s business, perform weaker than expected as the strength of the competition begins to bite. The strength of the sterling also had a negative effect.
“However, surprisingly its letters business is performing better than expected which is a positive. In addition to this, continued cost cutting has helped to compensate for any impact on profits.”
Robin Speakman, analyst, Shore Capital
“We currently list Royal Mail as a ‘hold’ as growing competition and current pressures on profit margins remain a concern, however longer term attractions continue for a balanced portfolio.
“This morning’s update on trading conditions across RMG’s activities reveals total revenues ahead by c.2% at the group level. We had anticipated a negative performance through the first half of -0.5%. However, the variance in individual business area performance is notable. UK Parcels are seeing tougher competitive effects than anticipated with mix changes seeing revenue down by -1% (against volumes up at +1%). Management indicates that measures are to be implemented to impact the second quarter performance to see a stronger revenue flow – we shall see, but a second quarter-skewed total group performance in revenues and profitability is now anticipated (indicating margin improvement heavily weighted to H2). Within the parcels performance we note that stronger Sterling has impacted outgoing parcels from the UK, the division’s growth performance has been hit by an estimated 150 bps, this is something we had not anticipated and this is not expected to be recovered.
“UK letters are seeing a slightly better performance than envisaged with pricing improvements seeing revenues ahead +3% against a better than anticipated volume decline of -3% (we still expect a slightly worse performance than this for the full year). GLS parcels in Continental Europe are performing well ahead of our expectations with Q1 volume and revenue growth of 6%. With margins skewed to the H2 period and exceptional and transformation costs etc. skewed to the H1 period, the overall group revenue performance on our forecasts for the full year looks unchanged at present, with margins and profitability forecasts retained. On cash flow valuation grounds, we retain a BUY stance.”