Royal Mail (LSE: RMG) has just delivered its trading update covering the nine months ended 25 December and disgruntled investors have marked it ‘return to sender’, with the stock down sharply. However, there’s a positive side to this morning’s negative reaction.
Beta Mail
The stock market certainly didn’t welcome today’s results package, with Royal Mail’s share price down 5.83% at time of writing. Addressed letter volumes fell 6% and revenues 5%, which includes the crucial Christmas rush period. Everybody knew letter volumes would decline but the rate of slippage appears to be accelerating. Royal Mail reported flat revenues as a result, with increased “business uncertainty” hitting volumes, notably in advertising and business mailings. I can only see that letters will continue to sink as a flood of electronic mail gets even bigger.
Parcels are a different matter. Royal Mail needs strong growth in this area to offset letter declines. It should be helped by the growing shift to online shopping even though it’s hindered by Amazon and specialist delivery rivals. Parcel volumes rose 2% and revenues 3%. However, Parcelforce Worldwide volumes fell by 1%, which partly reflects a very strong prior period, and more worryingly, what the group calls “the increasingly competitive express parcels market”.
Dead letter day
Its pan-European parcel delivery service General Logistics Systems (GLS) was the star performer with 9% revenue growth, which partly offset a 2% dip in the larger UK Parcel, International and Letters (UKPIL) division. Overall, group revenue was flat.
You can see why the market has reacted in such a negative way. Royal Mail will continue to restructure as it seeks to lessen the blow from declining letters and take advantage of the boom in parcels thanks to internet shopping. Management also has further scope to improve performance and cut costs, with chief executive Moya Greene pointing out that its cost avoidance programme remains on track.
Given today’s mixed postbag you won’t be surprised to see that the Royal Mail share price has continued its decline from the post-flotation high of around 615p this time three years ago. Today, it trades at just 423p. On the plus side, the stock no longer looks overpriced, trading at 10.88 times earnings. Today’s drop could prove an attractive entry point for income seekers, with the stock now on a forecast yield of 5.3%, fairly well covered 1.7 times. That looks attractive for what remains a relatively stable and secure business.
Part and parcel
I wouldn’t pin too much hope on the stock’s growth prospects. Earnings per share growth is forecast to hover between zero and 1% over the next three years, while profit growth is also likely to be slow. The company also faces tricky negotiations with the union over its final salary pension scheme, which so many other companies have replaced with cheaper but inferior money-purchase schemes. Royal Mail currently pays £350m of cash each year into its scheme. The staff consultation period ends in March, although the company’s proposals may be delayed until April 2018.
Royal Mail is a slow but steady income play. Snail Mail, you might call it. But it’s still worth a place in a balanced portfolio.
