24 Nov 2019, 01:44
Royal Mail shares dive 17% as its turnaround falls behind schedule
By Brian Donnelly @BrianDonnellyHT
SHARES in Royal Mail dropped significantly as it warned its turnaround programme was not on track despite improving profits and revenues over the past six months.
The company’s shares slid 17 per cent to 192.4p at one stage as it said its transformation plan is “behind schedule” and also cautioned investors that its UK business could make a loss in the next financial year.
Analysts described the statement as a mixed bag offering cautious optimism.
The firm updated investors over the performance of the business a week after it secured an injunction to block postal workers from taking part in strike action.
Later, the business came under a separate spotlight as Labour said nationalisation plans would extend to taking ownership of Royal Mail at the earliest opportunity and stopping post office closures.
In the trading update, the London-listed company warned that the UK division could be loss-making in the coming year, due to revenue and cost headwinds as well as significant investment by the company.
Royal Mail hailed its best UK sales performance for the “past five years” but warned the outlook for its letters business is “challenging”.
The delivery giant saw revenues rise 5.1% to £5.16 billion in the half year to September 29.
It jumped to a £173 million pre-tax profit, up from a £33 million profit for the same period in 2018.
Rico Back, group chief executive, said the company’s profitability has been “in line with expectations for the half year, despite considerable UK economic and political uncertainty”.
The company said revenues from its letters business are the “best in five years” but still reported a 1.4% decline in the division.
It also cautioned that a slump in business confidence is expected to have an impact on letter volumes over the next year.
Parcel revenues more than offset the decline in the letters arm, with sales increasing 5.6% on the back of a 5% jump in parcel volumes.
Mr Back said: “People are posting fewer letters and receiving more parcels. We have to adapt to that change.
“The challenging financial outlook in the UK means now, more than ever before, we need to make the changes required, and accelerate them, to ensure a successful UK business.
“We remain committed to investing £1.8 billion in our transformation. We want to change, working with our unions, but we can only do so through an affordable resolution.”
He said: “We are investing more because of the industrial relations environment, the General Election and Christmas, to underpin our quality of service at this key time. This is likely to impact our productivity for the remainder of the year. When combined, revenue and cost headwinds could possibly result in a break-even or loss-making position for the UK business in 2020-21.”
Last week, the firm won an injunction from the High Court to block potential strikes by postal workers but the CWU has said it will appeal against the decision.
In its half-year report, the company said that “industrial action, or the threat of it, can only hurt our company, and our colleagues”.
It added: “That is because, in today’s postal market, our customers have choices. Consumers can send a text or email when they would once have written a letter; and shippers can choose from a wide range of delivery companies, not just Royal Mail.”
John Moore, senior investment manager at Brewin Dolphin, said: “Royal Mail has delivered another mixed bag of results, but there is cautious optimism in today’s statement.”
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: “We’ve always known Royal Mail faced an uphill struggle, as people and businesses send fewer and fewer letters and delivery companies jostle for position in the growing parcel business.
“Unfortunately the group’s key weapon against those headwinds seems to have misfired badly.
“Royal Mail’s investment case always rested heavily on the argument that years of public ownership had left the group bloated, under-invested and with lots of low hanging efficiency savings to harvest.”