RM confident of meeting full year expectations

[RobertT]

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Royal Mail has issued a trading update for the nine months ended 28 December 2014. The trends seen in the business are broadly similar to that reported at the half year stage, with a better than expected performance from the UK Letters business and a continued strong performance from the European parcels business (GLS), offset by on-going competitive pressures in UK Parcels.

Overall, Group revenues rose by 1% in the first nine months of the year. In UK Parcels, volumes were up 3% in the first nine months, a slight improvement on the 2% growth seen in the first half, supported by growth in import parcels. Parcel revenue performance was flat year-on-year (-1% in first half) as the Group continued to be impacted by "a highly competitive environment in all the major channels." The Group handled around 120m parcels in the month of December alone, 4% more than last year with Moya Greene, CEO, saying "Royal Mail delivered one of its highest ever quality of service performances for parcel delivery to our customers over the month." This is in contrast to well-publicised problems reported by competitors such as Yodel.

UK letter volumes declined by 3%, which was in line with the first half performance and better than the Group's forecast range of a 4%-6% decline per annum. Letter revenue was flat, compared with up 1% in the first half, partially reflecting the diminishing impact of election mailings over the year.

The European parcels business (GLS), which accounts for almost a fifth of Group revenues, continued to perform well, growing volumes and revenues by 8% in the first nine months of the year.

Moya Greene, CEO, commented:
"Overall, trading in the nine months ended 28 December 2014 has been in line with our expectations, with the seasonal increase in parcel volumes coming through as anticipated. Given our performance over the Christmas period, and that we continue to expect to hold underlying UKPIL (UK Parcels, International & Letters) operating costs before transformation costs flat for the full year, we are confident that the outcome for the full year will be in line with our expectations."

Our view:

The surge in popularity of online retailing has caused problems for some parcel delivery firms this year. Courier firm Yodel, for example, struggled to deal with the huge jump in online orders following the Black Friday sales. No such problems for Royal Mail (the Group took a Boy Scout approach, and started planning for Christmas in April). The Group has delivered a solid Christmas performance, enabling it to leave its full year expectations unchanged.
The share price has responded positively to the news, but then again expectations were not particularly high prior to today's announcement, having come down a long way over the last year. At the start of 2014 Analysts were pencilling in adjusted earnings per share (EPS) of 45p for the current financial year, rising to 52p in 2016. The expectation now is that the Group will only deliver EPS in the region of 30p for this year and next. It is not surprising therefore that the share price has struggled, down by around 28% over the last year prior to today’s announcement, compared with a broader market which has been broadly flat.

The problems stem largely from intensifying competition. The UK Parcels business, which was supposed to be the main growth engine for the group, has stalled, with revenues flat over the first nine months of the year. The demise of one of Royal Mail's competitors, City Link, in late December, shows how fiercely competitive this market is. Admittedly, City Link had been struggling for many years but there is little doubt that the UK parcel market is a challenging place to operate at the moment. With Amazon now launching its own delivery service, things don’t look like they’re going to get easier any time soon.
There are also competition concerns in the UK Letters business. At present it is actually performing much better than expected - volumes are declining by 3%, but that is around half the rate of decline the Group expects. However, Royal Mail is worried that growing competition from direct delivery operators such as TNT (branded as Whistle) could reduce revenue by over £200m in 2017-18, posing a threat to its Universal Service Obligation. In December the regulator Ofcom announced that it had decided against imposing stricter regulations on direct delivery operators, which dealt a blow to Royal Mail’s share price. Regulatory uncertainty is part and parcel (sorry!) of investing in Royal Mail shares, and this issue is likely to rumble on.

Nevertheless, there are reasons to be positive. The European parcels business continues to perform well, while the Group appears to be making good progress with its cost saving initiatives. Having spent so long in public hands there is little doubt that efficiency savings are there for the taking, which could help drive margins higher.
For the current year the shares offer a yield of 4.7% (variable and not guaranteed) and trade on a price to earnings ratio (P/E) of 14. That valuation doesn't look particularly stretching for what is fundamentally a very cash generative business with a strong balance sheet (supported by a substantial London property portfolio) and attractive yield. After their recent rally from below 390p to the current level close to 450p, further progress may depend on Royal Mail demonstrating that it can improve the growth rate of the parcels business.

[El-Bandito]

Bonus?????

[El-Bandito]

How can this be,poster? Our holier than thou management have been swearing on their lives that parcels dropped off during December. I am confused. Who? Do I believe, now?

[pants123]

How can this be,poster? Our holier than thou management have been swearing on their lives that parcels dropped off during December. I am confused. Who? Do I believe, now?

Royal mail change their minds like the wind...

I dont believe any thing they say... what goes on behind closed doors non of us will know. Hence they can make up nonesense to the workers.