Royal Mail still delivering disappointment

<p>That Royal Mail needed to take additional steps (on top of long-standing self-help) to offset perceived and actual sensitivity to Brexit and sterling’s devaluation was already priced in before Thursday’s interim results.</p>

That Royal Mail needed to take additional steps to offset Brexit and sterling’s devaluation was already priced-in before Thursday’s interim results.


The negative surprise—accounting for the steepening fall of RMG shares into the afternoon session—was the extent of the acceleration of letter revenue deterioration (some 6%) and resulting hit to interim profits expectations. We note a handful of brokerages indicated the miss was around 10%.

That’s obviously a problem for full-year pre-tax profit forecasts in the market of around £407m. (Royal Mail has not published clear income guidance.)

With £100m more lopped off cost plans, transformation expenses trimmed by £30m, and the long-term revenue growth run-rate (c.1%-2%) intact in the first half (upheld again by strong European trading) the group looks to be running close to flat-out on as many cylinders as possible.

This does not provide a great deal of confidence that RMG can notch up the pace into year-end to the extent required to stem operating margin contraction. Therefore forecasts may need to be lowered.

Whilst the group’s efforts to reduce seasonality within the business by selective logistics acquisitions (most recently in Spain) are continuing, the goal is a work in progress.

The group will keep its boilerplate comment that ‘the outcome for the full year is highly dependent on the important Christmas period’ handy.

That implies the long-standing discount to blue-chips is also here to stay.


From a technical perspective, Royal Mail’s share price chart has a similar profile to many large British consumer-focused groups: a clear downtrend that precedes Brexit, followed by subsequent recovery, but not further than the long-term falling trend.

Variations on the theme often see shares like this better or worse-positioned relative to the overarching trend, and such stocks can be expected to perform commensurately with those prospects over the nearby horizon.

Unfortunately, RMG stock appears to fall into the category of being poorly positioned in terms of the foreseeable outlook.

At least shares have formed a double bottom (465.5p/463.4p) in May and in the current session respectively.

The formation confirms support first seen in March and April 2016 and in confluence with the important 61.8% Fibonacci interval of the stock’s February to Referendum day year high.

At some point, consolidation under 497p will be completed and the region could be surpassed, notwithstanding Thursday’s upset which broke the range, although the support zone mentioned previously has held.

Either way, we do not have sufficient confidence in Royal Mail’s fundamentals to expect the more than two-year ceiling c. 530p to be removed any time soon.





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