Will Investors Return Royal Mail’s Interim Results To Sender?
Spreadex | Nov 13, 2017 05:24
The British institution looks as battered as a mishandled parcel. After starting the year at £4.60 it soon found itself in trouble, plunging to £4.10 before January was over. It remained around this level for the next few months, before climbing towards £4.50 across May and June. That seems to have spent all of the company’s energy however, as since then the stock has been on a firm decline, eventually hitting an all-time low of £3.68 at the end of October. Royal Mail (LON:RMG) PLC now sits at a current trading price of £3.77.
The company’s general sense of despondency was present in January’s third quarter update. Group revenue was flat for the first 9 months of the year, while Royal Mail warned that Brexit uncertainty was impacting the amount of junk mail it delivers, with firms pulling back on the number of ‘advertising and business letters’ they send out.
The firm’s full year figures in May were slightly more positive. Revenue rose 1% to £9.8 billion, while pre-tax profit easily beat estimates, jumping 25% to £335 million thanks to the strength of the company’s international delivery arm GLS. Yet it was hard to be too upbeat when letters revenue – half of the total figure – fell 5% off of a 6% plunge in volumes, even if the parcels business saw revenues rise 3% to £3.3 billion (a division under constant threat from Amazon (NASDAQ:AMZN)).
Most recently was July’s first quarter statement. Total group revenue rose 1%, again thanks to a rise in volumes at GLS, while the decline in letters revenues slowed to 4% due to higher than forecast income from political mailings in the run up to the UK’s general election.
However, analysts have been incredibly bearish about the stock, despite the signs of life in the last quarter. Credit Suisse (SIX:CSGN) piled onto the stock in October, cutting its target price from £4.92 to £3.25 as it argued that worsening letter revenues – exacerbated by increased internet usage among the over-65, and attempts by the UK government to cut down on mail volumes – alongside a rise in labour costs undermines the sustainability of the company’s earnings.
In terms of next week’s half year results, Royal Mail really needs to have – somehow – found a tourniquet for its haemorrhaging letters revenue, or at least further proof that the parcels division can pick up more of the slack. Any word on its outlook for Christmas will also be welcome, as well as progress on averting the mass strike that has been threatened in the last few months.
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Royal Mail PLC has a consensus rating of ‘Hold’ with an average target price of £4.38.
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