IDS (LON: IDS) share price has moved sideways in the past few weeks as concerns about the company remains elevated. Shares of Royal Mail’s parent company were trading at 233p, where it has been in the past few days. This price is ~31% above the lowest level in 2022.
Royal Mail bankruptcy risks
Royal Mail, the main letter and parcel carrier in the UK, is remains on the verge of collapse as differences between the management and employees continue. The biggest story last week was that talks between the company’s management and the Communication Workers Union (CWU) broke down.
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As a result, the initial risk is that Royal Mail’s employees will resume their strikes in the coming weeks. These strikes will likely make the company more unprofitable. The most recent financial results showed that the company lost over 296 million pounds in the first nine months of 2022.
According to the Telegraph, the management believes that the employees are engineering the company’s bankruptcy. The idea is that the employees want the company to go into administration, which will see it nationalized. If this happens, they believe that the firm will avoid the radical surgery that is needed to lower costs and make it profitable.
However, the management has warned that moving into administration will be risker for them. For one, it will see the company move into administration, which will lead to tougher restructuring. The letter said:
“It is important that everyone is clear that, if our finances come under worse pressure, the legislation does not provide for re-nationalization, but instead a system called special administration.”
What next for IDS?
Therefore, with the company and the union in disagreements, the question is what to expect in the near term. For one, the management has warned that all options are on the table. One of the proposals is to separate IDS into two companies: Royal Mail and GLS.
The thinking is that separating the two businesses will give investors a chance to own the profitable GLS division. For years, GLS has been known for subsidizing the loss-making Royal Mail division. While this is an option, some analysts warn that separating the two companies will not be easy because of how interlocked they are.
The other option is to continue the negotiations and increase employees’ wages. The challenge is that this will compress the company’s margins at a time when its growth has stalled and competition has risen. Therefore, it will mean that the company will see higher losses going forward.
This will happen at a time when the company’s balance sheet is struggling. Its total cash and short-term investments dropped from over 1 billion pounds in March 2022 to September 2022. The situation has worsened since then because of the strikes,
In all, Royal Mail faces a difficult time ahead as losses and inefficiencies mount. For one, experts believe that the company is severely overstaffed, with over 160 employees. Also, the company is being held hostage by laws that force it to deliver mail in areas that are perenially unprofitable.
IDS chart by TradingView
The daily chart shows that the Royal Mail’s parent share price has moved sideways in the past few weeks. In this period, the stock has formed a symmetrical triangle pattern that is shown in red. This triangle is nearing its level of confluence.
It has also moved to the 50-day and 100-day moving averages. Therefore, I suspect that the shares will soon have a bearish breakout as sellers target last year’s low of 175.15p, which is ~25% below the current level.
