Royal Mail - Nothing to see here

[TrueBlueTerrier]

http://www.hl.co.uk/shares/share-resear ... o-see-here" onclick="window.open(this.href);return false;

Royal Mail saw group revenues increase 1% in the first three months of the year, as a strong performance from the international GLS business more than offset weakness in UKPIL.

The shares were up 3.6% following the announcement.

Our View

'Brenda from Bristol' might have spoken for the country when she reacted to news there would be a general election with "You're joking - not another one", but Royal Mail CEO Moya Greene was probably punching the air. All those campaign leaflets have helped to slow the inexorable decline of addressed letters, and helped Royal Mail post a positive performance in the first quarter.

The UK's repeated polls are a welcome boost at a time when conditions are tough. Letters were always expected to decline, but, if you exclude electoral mail, declines are at the top end of expectations. Meanwhile competitive pressures in UK parcels, which was supposed to be Royal Mail's growth engine, show little sign of easing.

Parcel volumes may be growing, thanks largely to online retailing, but pricing is tough. Deutsche Post, the big boy of European post, has stepped into the market through the acquisition of struggling UK Mail, which will only add to the pressure.

Current economic uncertainty hasn't done the group any favours either, with businesses reining in their direct marketing spend. We're not sure the volumes will return with improving conditions, as the trend to move marketing spend online gathers pace.

For now profits are being supported by stripping out costs that developed over years of public ownership. That's an opportunity others don't have and is supporting margins. However, it can't continue forever and the decline in letters, together with parcels pricing pressure, means the benefits are quickly disappearing.

Nonetheless, we feel Royal Mail is in a much better position than other postal operators. It is by far the largest UK player, with over 50% of the parcel market, so can invest more in technology and service. The group is also proving unexpectedly successful internationally, and is expanding its footprint with acquisitions in Europe and the US. Over time this will be an increasingly important part of the business and is delivering steady growth.

It's worth noting that the group has yet to agree a replacement for its defined benefit pension scheme, and that is likely to dominate share performance in the short term. A replacement could prove costly in either employer contributions or industrial action.

The balance sheet is otherwise healthy though, and assuming the pension situation is resolved satisfactorily, the prospective yield of 6% looks well underpinned.

Q1 Trading Update

UKPIL, which includes both the UK parcels and UK letters business, saw total revenue fall 1% in Q1.

This was driven by the continuing fall in UK letter revenues, down 4% despite a boost from political mailings associated with the general election. Excluding the impact of election mailings, addressed letter volumes fell 6% in the period. Marketing mail looks like it is continuing to struggle.

Royal Mail saw group revenues increase 1% in the first three months of the year, as a strong performance from the international GLS business more than offset weakness in UKPIL.

The shares were up 3.6% following the announcement.

Q1 Trading Update

UKPIL, which includes both the UK parcels and UK letters business, saw total revenue fall 1% in Q1.

This was driven by the continuing fall in UK letter revenues, down 4% despite a boost from political mailings associated with the general election. Excluding the impact of election mailings, addressed letter volumes fell 6% in the period. Marketing mail looks like it is continuing to struggle.

By comparison UK parcels continues to see volume grow, up 5% in the first quarter. That follows a strong performance from Royal Mail account parcels, which has added new contracts and gained traffic from existing customers, and international. However, revenue in the division rose just 3%, reflecting the mix of business.

GLS remains the jewel in Royal Mail's crown, with volumes up 5%, and revenues rising 6%. Growth covered all regions, with particular strength in Italy. Excluding the impact of Easter and other European public holidays, volumes rose 4%. Recent acquisition in the US and Spain are said to be integrating well.

While proposals for an alternative defined benefit pension scheme have been accepted by the managerial union, Unite/CMA, discussions with the larger CWU continue. If accepted the new pensions proposals are not expected to cost any more than the existing scheme's £400m a year.

Guidance for the full year remains unchanged, with the cost avoidance programme expected to save £190m of UKPIL operating costs in 2017-18.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

All yield figures are variable and not guaranteed. The information in this article is not intended to be advice or a recommendation to buy, sell or hold any investment mentioned, nor is it a research recommendation. No view is given as to the present or future value or price of any investment, and investors should form their own view in relation to any proposed investment.