Royal Mail's Heavy Load

[TrueBlueTerrier]

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U.K. Postal Operator's Biggest Challenge Is Growth

Royal Mail might look like a first-class play on one of the world's biggest e-commerce markets. But the landmark float of the U.K. postal operator, expected to be worth up to £3.3 billion ($5.35 billion) when it starts trading in London this month, comes with some heavy baggage.

A likely strike soon after Royal Mail's listing is a reminder of the company's Achilles' heel. The powerful Communication Workers Union should get the votes it needs to call a strike in protest over the privatization, pensions and pay. Sure, this would be the union's first nationwide strike since 2009, and any hit to Royal Mail's sales will likely prove temporary. But the re-emergence of labor relations troubles is a concern.

The bigger challenge for Royal Mail is growth. There is no end in sight for a near decadelong slide in letter volumes, down 8% in the year to March. That makes sustaining growth in parcel volumes, which account for almost half of Royal Mail's sales, important if the group is to deliver targeted 2% to 3% annual sales growth over the next few years.

True, the U.K. spends more online per capita than any other market, which has boosted demand for delivery services. But just as letters are being replaced by email, the e-book market is growing rapidly while more shoppers are opting to collect online purchases from stores. Parcel volumes in the U.K. could grow 3% a year through 2018, down from an annual average 3.7% rise since 2008, estimates PricewaterhouseCoopers.

That could leave Royal Mail more reliant on price increases to sustain sales growth. But that isn't easy given there are some 15 logistics operators vying for a piece of Royal Mail's roughly 50% share of the U.K. parcel market by volumes. And cutting costs is growing harder now Royal Mail is most of the way through a major restructuring. While operating profit margins more than doubled to 4.4% last year, Royal Mail is now targeting a 0.5-percentage-point annual improvement.

Royal Mail's offering was fully subscribed within hours of its launch late last week. The 7% dividend yield at the midpoint of the price range certainly looks appealing. Even so, investors should hope the final price delivers a decent enough discount.

[Lounge Lizard]

"There is no end in sight for a near decadelong slide in letter volumes, down 8% in the year to March"

[UnhappyGremlin]

I thought Moya and RM had promised a 7% growth in mail volumes for next year?

I was suspicious though, you know, announcing a rise just before privatisation....