'Sell' Royal Mail advice after it delivers fewer letters

[TrueBlueTerrier]

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A broker is advising investors to sell shares in Royal Mail (LON:RMG) (RM) after the formerly state-owned firm delivered more parcels than a year ago but fewer letters.

Charles Stanley cut its recommendation to 'reduce' from 'hold' as the UK postal operator unveiled flat revenue in the three months to June 28.

RM said parcel volumes picked up 3% while revenue rose 2%, but letter revenue dropped 4% and volumes declined 5% despite a lift from mailings linked to the election in May. Shares fell 2p to 509.5p.

Charles Stanley analyst Tony Shepard said it was early in the year and RM's final results would depend on the peak Christmas season.

But he said the trading update showed low single-digit revenue growth was elusive, forcing RM to cut costs.

Shepard also highlighted competition in the parcel market and the potential threat posed by a regulatory review of the company.

"After a period of good share price performance, we move our recommendation to 'reduce'", Shepard said in a note.

Another broker, Investec, was more upbeat despite the flat revenue coming in below its estimate of a 0.1% rise.

It said it did not expect Ofcom’s regulatory review, which concludes next year, to result in any substantive changes.

Investec added that RM was trading at a 30% discount to the sector, which it said was excessive.

"We believe this discount is too great and reiterate our 'buy' recommendation and 580p target price," the broker's Alex Paterson said.

RM said the higher parcel revenue should be seen in the context of a relatively weak performance in the same period a year ago.

Express parcel arm Parcelforce Worldwide increased revenue by a fifth as it broke into new markets and extended opening hours.

Its General Logistics Systems (GLS) business did better than hoped due mainly to continued good trading in Italy and an improvement in Germany.

Chief executive Moya Greene said the company traded broadly in line with expectations.

She said: "We have seen a continuation of the overall market trends we saw last year.

"We have benefitted from the parcel initiatives that took effect in the second half of last year and a good performance from GLS.

"Our trading environment remains challenging and we are stepping up the pace of change to drive efficiency, growth and innovation, while maintaining a tight focus on costs."

[arnold cheshire]

i wondered why my walk has gone so easy maybe its the falling volume of letters