Royal Mail’s shares closed below their privatisation price for the first time on Thursday after the company reported that profits more than halved in the six months to September.
The postal group said revenues had fallen at its core UK business and it had failed to hit productivity and cost savings targets.
Its share price closed at 325.8p — down 6.5 per cent on the day and below the 2013 initial public offer price of 330p.
Pre-tax profits dropped to £33m in the six months to September 23, against £77m in the same period a year before — a decrease of 57 per cent.
However, overall group revenue increased by 1 per cent on an underlying basis to £4.9bn, as the company’s international parcels division, GLS, made up for lower sales in the UK, where revenues fell 1 per cent to £3.6bn.
Royal Mail’s struggle to squeeze more efficiency out of its vast network, along with a worse than expected decline in the number of letters sent by Britons and higher labour costs at GLS, were factors behind a damaging profit warning in October.
The company needs to improve productivity in order to offset the costs of a wide-ranging labour settlement struck this year, which averted the threat of nationwide strikes in Britain. Along with a pay rise and a new pension scheme, management also pledged to reduce working hours.
Chief executive Rico Back, in the role since June, said productivity performance in the second half of the year would outshine the 0.2 per cent deterioration recorded in the first six months, which was well below an annual target of 2-3 per cent.
Most of this would come through changes to the way mail is handled and processed, rather than job cuts, Mr Back said.
“We have 90 per cent of our letters automated but only 10 per cent of parcels,” he told the Financial Times. “The trials are designed to cope with increasing volumes in parcels through increasing automation.”
“Today’s release offered no real new information on the outlook for Royal Mail following the profit warning,” wrote analysts at Investec. “We are no closer to establishing how long the current review of UK productivity measures and initiatives will take . . . or to understanding the new management team’s long-term strategy.”
Investors will have to wait until March for more details, when the company holds a capital markets day setting out its vision for the next five years.
Although profit margins shrank at GLS, which has been a bright spot for Royal Mail in recent years, concerns about the group’s ability to keep increasing its dividend will have been soothed somewhat after the interim payout rose from 7.7p to 8p.
The disappointing half-year performance caps what has been a turbulent year for Royal Mail.
After an agreement with the Communication Workers Union staved off the threat of industrial strife, in the summer Royal Mail shareholders mounted one of the biggest investor revolts of its kind in UK corporate history over excessive boardroom pay.
Royal Mail’s preferred measure of earnings — adjusted operating profit before transformation costs — was down 25 per cent to £242m in the half-year period. The metric excludes expenses from a long-running modernisation programme.
The company reconfirmed its lowered annual earnings target of £500m to £550m, compared with the £694m it made in the previous financial year.
