Royal Mail edges closer to distant UK prize
Ken Odeluga May 18, 2017 6:00 PM
The market is responding to the outlook for Royal Mail's long-term market share with an extension of the share’s rise since the end of April to almost 10%, though it’s worth noting that the stock performance is still negative so far this year.
The market is responding to the outlook for Royal Mail's long-term market share with an extension of the stock's rise since the end of April to almost 10%. It’s worth noting however that the share's performance is still negative so far this year.
We agree that the parcels strategy is beginning to look more credible, so long as £600m annualised cost avoidance, reiterated as on track today, is delivered. If so, scope would increase for Royal Mail to target much of the UK’s mid-tier consumer and B2B delivery business from 2020, given its capability to deliver slightly more than basic service at scale.
It also helps that full-year £575m operating profit after transformation costs is almost exactly in line with our and the average market expectation. The moderate negative surprise here is that letter volume declines in the current year are expected to come in at the worse end of current expectations if business uncertainty persists. It’s a little puzzling why RMG has waited till the approach to the middle of the year to pencil this in. Still, this morning’s share price reaction suggests investors have reduced medium-term expectations of UK letter revenue growth to almost zero, which makes sense to us. Some buyers this morning are undoubtedly interested in the typical upsurge in volumes seen during British election campaigns. With the window before the 8th June being unusually short, we’re even more inclined to exclude the impact of political election mailings from volume estimates, as RMG has.
Profit relief aside—note £712m income before transformation costs slightly edges the most sceptical forecasts—we expect RMG’s clear and present risks to clip its shares from here. Chiefly, transitioning pension arrangements could yet turn out to be more costly than is widely perceived if the threat of strike action is realised, and we think market optimism may be running ahead of corporate level. The company is not yet officially factoring in any future advantages at the margin and sees no change in annual payments from the current level of £400m, when the scheme changes from a final salary into a defined benefits one. Royal Mail may not be anticipating as smooth a transition as some investors.