Royal Mail delivers mixed bag as UK parcels disappoints but earnings hit forecast
Royal Mail delivered a mixed bag of full year results with numbers bang in-line with expectations but lower than anticipated revenue from the core UK parcel business and continued caution about the highly competitive market.
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At the reported level, showing only continuing operations, revenues were just about flat at £9.3bn, with pre-tax profit slumping by more than two thirds, as expected, to £400m.
Earnings per share dwindled to 32.5p from 127.5p a year ago, versus forecasts of 32.8p, but a 5% lift in the full year dividend to 21.0p impressed the market, along with management commitment to growing the payout.
Adjusted results including discontinued operations showed a 1% gain in revenue as the core UK Parcels, International and Letters (UKPIL) business produced flat underlying sales, while the European parcels business, General Logistics Systems (GLS), generated an unexpected 7% improvement.
The letters business, where competitive pressure has presumably eased since the failure of Dutch-backed rival Whistl this month, delivered a 1% fall in revenue, with addressed letter volumes excluding election mail down 4% in line with management’s medium term guidance of a decrease of 4-6% in the medium term.
Adjusted operating profits were up 6% to £740m before £145m of costs from chief executive Moya Greene's transformation programme were included, with operating costs before the transformation costs down 1%, better than internal expectations.
Costs were Greene's big focus in the year, but although non-people costs were cut 4% staff costs still increased by 1%.
Greene, who continues to expect ongoing transformation costs of around £120-140m per year depending on the level of voluntary redundancies, said the focus on efficiency offsetting lower than anticipated UK parcel revenue.
"Our trading environment remains challenging, but we are now poised to step up the pace of change to drive efficiency, growth and innovation, while maintaining a tight focus on costs," she said.
"At this early stage of the financial year trading is in line with our expectations, but as in previous years our performance will be weighted to the second half and will be dependent on our important Christmas period."
Analysts at Deutsche Bank noted that the better cost control meant earnings before interest and tax beat forecasts despite transformation costs being £5m higher predicted.
The bank currently forecasts parcel volume growth of 2% for the new financial year, with price/mix to be down 2% for the year to March 2016 "as we expect competitive pressures to continue in the UK parcels market".
DB said it liked the company for its cash flow generating ability and strong balance sheet "but we think the company faces material headwinds ranging from rising competition in UK Parcels, GLS, structural decline in mail volumes and cost pressures on GLS Germany".
Shore Capital viewed the only surprise in the results being a lower interest charge driving a better than expected PBT outcome than forecast.
Analyst Martin Brown said, while in his opinion Royal Mail might seem to have a "fairly full" valuation, the cost of transforming and rationalising the business will start to come to an end from 2017 financial year onwards, meaning free cash flow (FCF) should rise quickly.
"We currently forecast a 62% and 20% increase in FCF in 2017F and 2018F respectively. And this is before we consider the potential for value realisation through rationalising Royal Mail’s extensive portfolio of real estate. Therefore in our opinion, a medium term perspective is required when valuing Royal Mail."