Amazon threat part and parcel for Royal Mail

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Given that pre-tax profits came in above consensus forecasts, the 4 per cent share price fall that greeted Royal Mail 's (RMG) full-year results may have surprised management. The drop might have had something to do with the muted tone of chief executive Moya Greene, who cautioned that the group's highly competitive markets remain "challenging".

It would be a little unfair if the £133m decline in adjusted pre-tax profits spurred the sell-off. The FTSE 100 member may be playing catch-up with the UK's changing postal habits, but it is in control of the speed at which it spends its way towards future relevance. To that end, Royal Mail would prefer the market to see the £191m of "transformation costs" - above the £180m figure forecast at the start of the financial year - as a necessary investment rather than an impairment. However, stripping out these costs still revealed a 21 per cent drop in reported operating profit.

In truth, the lion's share of those increased costs came from voluntary redundancies - up from £81m to £117m in the 2015-16 financial year - although project costs also increased by 31 per cent to £72m. The latter included investments in the latest acceptance times at mail centres and regional distribution centres for tracked products, as well as new next-day parcel collection services for eBay marketplace sellers.

This could help to hold back competition from Amazon's rapidly growing logistics division, although Royal Mail also needs big delivery contract wins. New deals signed in the period with John Lewis, Marks and Spencer and Waterstones "more than offset" volumes lost to the US e-commerce giant, although Ms Greene acknowledges that future share of the parcels market is dependent on how aggressively its largest competitor expands.

The third plank of the group's turnaround strategy is 'defending letters'. This was a qualified success in the year, as addressed letter volumes decreased by just 3 per cent, as opposed to a forecast decline of 4 to 6 per cent. Marketing mail revenue, which grew in the first half was flat across the year, while print advertising media fell by 11 per cent.

Analysts at Liberum expect an adjusted pre-tax profit of £602m and EPS of 45.4p this financial year, against £537m and EPS of 40.5p in the 12 months to March 2016