Royal Mail struggles to deliver good news

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https://www.ii.co.uk/analysis-commentar ... s-ii528135

This UK and overseas delivery company has shrunk by more than a third over the last year. Buy, sell, or hold?


Full-year results to 26 March
Revenue down 5% to £12.04 billion
Overall group operating loss of £748 million, down from a profit of £577 million
No final dividend payment
Net debt of £1.5 billion, up from £985 million
Guidance:

Targeting an overall group adjusted operating profit for the current financial year (2023/24)
Non-executive chairman Keith Williams said:

"As we enter 2023-24 we have grounds for optimism. The economic climate remains challenging, and Royal Mail faces the task of rebuilding business from the damage caused by industrial action. To do this successfully and plan for the long term, urgent reform of the Universal Service Obligation is essential.

“Our plan is to return to group profitability this year but also seize the opportunity for both businesses to deliver ongoing profits thereafter, to the benefit of both our employees, customers and shareholders."

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Formerly known as Royal Mail Group, International Distributions Services
IDS
0.98%

operates UK and overseas businesses.

Its UK focused Royal Mail division collects, sorts, and delivers letters and parcels. Under Royal Mail and Parcelforce brands and as the UK’s sole designated Universal Service Provider, it provides a ‘one-price-goes-anywhere’ service on a range of letters and parcels to over 31 million addresses across the UK, six-days-a-week.

Its international business - General Logistics Systems (GLS) - works overseas in around 40 countries including more than 30 in Europe, Canada, and a selection of states in the USA.

For a round-up of these latest results announced on 18 May, please click here.

ii view:

Tracing its roots back more than 500 years to 1516, IDS today employs more than 150,000 people. A constituent of the FTSE 250 index, its competitors arguably include the likes of United Parcel Service Inc Class B
UPS
0.81%

, FedEx Corp
FDX
1.92%

and Deutsche Post AG
DPW
0.26%

.

The largely UK focused Royal Mail division generates most of the company's sales at around two-thirds, with GLS making up the balance. Royal Mail is currently undergoing a large-scale modernisation programme, designed to boost productivity and deal with the impact of declining letter mail volume.


For investors, management’s desire to right size and improve productivity, and its continuing disagreements with staff unions, remains front and centre. Inflationary cost pressures such as elevated fuel bills and increased customs processing following Brexit continue to warrant consideration. So do hopes to reform its universal service obligations with the UK government and suspended dividend payments.

On the upside, management’s push to increase efficiency across both businesses, but particularly at Royal Mail, is ongoing. GLS remains profitable, with potential for a separation of both businesses going forward a possibility. Management still considers its balance sheet to be strong, with liquidity of £1.7 billion available, while an overall group return to profitability could see a return to the dividend list.

A consensus analyst fair value estimate in excess of 250p per share looks to inject some longer-term optimism. However, there are some serious hurdles for the business to navigate, and management will be judged on how well it executes the modernisation programme. For now, it remains sensible to approach the shares with a generous dose of caution.

Positives:

Exposure to online shopping trends
Geographical diversity
Negatives:

Inflationary costs pressures
Falling letter volumes
The average rating of stock market analysts:

Hold