Royal Mail Outlook Causes Concerns

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Royal Mail Thursday reported higher profit for its last financial year as a better-than-expected performance in reducing costs in the UK offset lower-than-expected revenue in its parcels business, and the company said it will step up its transformation plan in the face of a challenging trading environment.

Amid a declining letters business and a cut-throat parcels market highlighted by the failure of City Link and Amazon's plans to launch its own delivery network, Royal Mail said it would stay focused on its transformation plan and cost cutting.

"Our trading environment remains challenging, but we are now poised to step up the pace of change to drive efficiency, growth and innovation, while maintaining a tight focus on costs," Chief Executive Moya Greene said.

Royal Mail reported a pretax profit of GBP569 million for the year ended March 29, up from GBP421 million a year earlier, even though revenue declined to GBP9.42 billion from GBP9.46 billion. It raised its full-year dividend to 21.0 pence from 20.0 pence.

Revenue was flat in the company's UK parcels and letters business, as letter revenue fell 1% while parcel revenue grew by the same amount, although operating profit before transformation costs improved to GBP615 million from GBP608 million as it cut costs. Revenue in its European logistics business grew 7%, more than the company expected, and operating profit improved to GBP115 million from GBP108 million.

Royal Mail said it still expects volume growth in the UK addressable parcels market to fall to about 1% to 2% a year in the short-term, although this will depend on how quickly Amazon Inc rolls out its own delivery network.

The company said trading so far in the new financial year is meeting the company's expectations, and as always, its performance will be weighted to the second half of the year and the key Christmas trading period.

Analysts said the results had met expectations, and the growth of the European logistics business was a positive, but expressed concern about the company's outlook and its reliance on cost-cutting to drive earnings growth.

"Whilst the exit of both City Link and Whistl may have removed some of the competition, it also serves to underline how tough this sector can be. Meanwhile, the competitive threat of Amazon looms large, with Royal Mail recognising that there will be an impact to its business and, even ahead of this, there was a slight decline in revenues," said Richard Hunter, Head of Equities at Hargreaves Lansdown Stockbrokers.

"With limited revenue growth potential in the near term, it's down to on-going cost control to improve earnings," Panmure Gordon analyst Gert Zonneveld added.