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Royal Mail yet to deliver on turnaround

Daniel Lane

Daniel Lane - Fidelity Personal Investing

Higher profits and the best UK revenue performance for five years at Royal Mail have this morning been marred by the company’s own admission that its much-needed turnaround plans are still “behind schedule”.


Despite posting pre-tax profits of £173m for the six months to September, along with an operating profit of £61m versus a £4m loss last year, the market’s attention has been grabbed by a range of roadblocks hindering the ambitious plans.

Earlier this year the company promised to invest £1.8bn in the UK postal service, with intentions to introduce 1,400 parcel postboxes across the UK, in the single biggest repurposing of the postbox network for over 160 years.

But a fractured relationship with unions have slowed progress, according to the company, and could end up in a “break-even or loss-making” position for the firm’s UK business in 2020-2021. Souring relations, threats of strike action and their knock-on effects on turnaround plans have seemingly taken the shine off the headline figures for investors.

Royal Mail shares are now down 16% at the time of writing, with the FTSE 250 company adding weak GDP growth and decreasing letter volumes could also hit its UK business.

Trouble in the post?

The postal operator had the European parliament elections to thank for boosting domestic letter volumes to their highest level in five years. The forthcoming UK general election should help performance for the next set of company results but the company warned this morning that that could be it for the momentum behind its UK packages and letters division for a while.

Email has clearly eliminated most of the demand for traditional post but Royal Mail has been able to rely on business mail as a stop-gap as it transitions to more sustainable profit lines. But, with the introduction of General Data Protection Regulation (GDPR) last year businesses have faced tougher rules to comply with when they contact customers for marketing purposes. Many firms took the introduction of new rules as an opportunity to revamp their email marketing permissions and get rid of the snail mail altogether.

This is why the timing of Royal Mail’s new business strategy was so important. The turnaround plans were meant to drive consistency and replace the company’s reliance on ad-hoc revenue streams and declining personal and business letters. As chief executive Rico Back reiterated, the firm has to get used to people posting fewer letters and receiving more parcels - hence the parcel postbox rollout. And with the plans in jeopardy, shareholders are clearly questioning where growth can come from now.

What’s more, shareholders are also having to contend with the prospect of the company being nationalised under a Labour government. The party is proposing a programme of nationalisation that would bring the company into public ownership but has been unclear so far as to the value it would place on it, should it go through with the plans.

All in all, some big hurdles ahead for the company, not least a planned appeal against disallowed pre-Christmas strikes from the union. But if the company can prevent industrial action and get employees back onside there might still be a turnaround yet.

More on Royal Mail

Five year performance

(%) As at 20 Nov 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
Royal Mail 18.8 0.7 -10.4 -17.4 -18.2

Past performance is not a reliable indicator of future returns

Source: FE, as at 20.11.19, in local currency terms with income reinvested

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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