Royal Mail shares: 3 factors to consider after full-year results

Royal Mail (LON: RMG) shares fell by 15% to 292p during intra-day trading yesterday after disappointing full-year results piled further pressure onto the embattled postal service.

Despite recovering to 320p today, Royal Mail is down 41% over the past year, and down 30% since its 2013 Initial Public Offering.

Royal Mail share price: full-year results

1) By the numbers

Revenue rose by 0.6% to £12.71 billion, falling short of the Refinitiv average analyst forecast for £13 billion. Further, pre-tax profit fell by 8.8% to £662 million, and operating profits slipped by 5.6% to £577 million.

However, some context is important. The group was one of the main beneficiaries of pandemic era lockdowns: in the fiscal year to the end of March 2021, net profit rocketed by 285% to £620 million.

Royal Mail says it will react by instituting further ‘price increases and growth initiatives’ despite having increased letter prices by 7% and parcel prices by 4% this year already.

More optimistically, domestic parcel volume is up 31% compared to pre-pandemic levels, and only down 7% year-over-year ‘due to normalisation post lockdown restrictions.’ CEO Simon Thompson argued ‘our future is as a parcels business, so we need to adapt old ways of working designed for letters and do it much more quickly to a world increasingly dominated by parcels.’

Letter volumes have fallen by more than 60% since fiscal 2005, and 20% compared to pre-pandemic levels. But the cultural shift towards highly profitable parcel demand appears here to stay.

Thompson enthused ‘over 50% of parcels are now processed automatically, the delivery of two new parcel hubs are on track, and we are reinventing our services and digital experiences to make sending and receiving even easier in an online age.’

The first hub is due to open next month and will have the capacity to sort 800,000 parcels a day. And parcel processing is expected to be 90% automated by the end of FY 23/24.

2) Downbeat leadership

Management sought to downplay expectations for a rapid profit recovery. Thompson noted ‘whilst 2021-22 presented operational challenges, with Omicron and elevated levels of absence, we continued to benefit from pandemic tailwinds, which are now dissipating.

Non-executive Chair Keith Williams agreed, noting ‘clear headwinds as we enter 2022-23, such as weakening GDP and growing inflationary pressures.’

The FTSE 100 company has increased its cost-savings program by £60 million to £350 million. But net debt still more than doubled from £457 million to £985 million. And it expects ‘revenue to decline in 2022-23, in particular the first half which has strong comparatives in the prior year, which included a period of lockdown.’

While this negative sentiment could be a tactic to moderate union demands, Brewin Dolphin analyst John Moore thinks ‘Royal Mail’s shares have been on the back foot since last summer, amid fears that the company’s performance during lockdown was merely a mirage.'

However, the company returned £400 million to investors through a share buyback and special dividend, which could add fuel to the current union feud.

3) Union battles

Negotiations between Royal Mail and the Communication Workers Union (CWU) are intensifying. Relations were already tense, as the postal carrier said it would cut 700 management roles in January, alongside the 2,000 axed in June 2020.

Royal Mail believes that ‘in the medium term, we still see potential for a 5%+ margin if we can complete our new pay deal with the union,’ but warned ‘the CWU pay deal is most material in terms of value, with 1% of pay equating to c.£45 million of cost inflation.’

But CWU deputy general secretary Terry Pullinger argues that ‘every single penny of the (adjusted) £758 million profit was…from key postal workers, not by board members and not by shareholders but by our members.’

Royal Mail has offered a 3.5% pay increase, with a further 2% dependent on hitting productivity targets. However, the union is seeking an inflation-based ‘no-strings-attached’ rise. And at 9%, CPI inflation is currently at its highest in more than 40 years.

Deutsche Bank analyst Andy Chu highlights the company is ‘the most exposed to potential consumer weakness’ and that ‘the pay negotiation with the unions could prove challenging in a higher inflation environment.’ JP Morgan analysts concurred in a recent note, arguing that wage negotiations were unlikely to be simple.

A spokesman for Royal Mail said it ‘will retain our place as the industry leader on pay and terms and conditions. We value the work we do with CWU and remain committed to agreeing a deal.’

But with profitability down and inflation raging, a deal the union will consider acceptable could hit Royal Mail shares hard.

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*Based on revenue excluding FX (published financial statements, June 2021).