Royal Mail faces testing times at home despite overseas earnings rescue

Oliver Gill
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Industry-wide business letter volumes have declined by 10 per cent in the last year (Source: Royal Mail)

Royal Mail posted full-year earnings slightly above expectations today but warned operational headwinds are buffeting its largest two divisions.

The FTSE 100 firm revealed annual revenues of £9.8bn, a one per cent increase on the prior year. Earnings were 44.1p per share, ahead of the 40.5p consensus.

UK letters, which accounts for half of all revenues, faltered. Volumes declined six per cent while sales were down five per cent.

“This has been a more challenging period for UK businesses,” said Royal Mail chief executive Moya Greene.

Royal Mail said if the current climate of business uncertainty continues, the contraction of letter volumes would be a the higher end of its four to six per cent forecasts for the next year.

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The firm’s second largest division, UK parcels, grew sales by three per cent to £3.3bn.

Royal Mail has more than 50 per cent of the UK parcels market. This should put it in a uniquely strong position to take advantage of shoppers that “turn to their mobile devices to order goods, rather than strolling down the high street”, according to Hargreaves Lansdown analyst Laith Khalaf.

Stiff competition

However, Khalaf said, Royal Mail "faces stiff competition from the likes of Amazon, who are using the gig economy to deliver parcels without all the costs of more traditional employment"

Gerald Khoo an analyst at Liberum said:

We remain concerned about the intensity of competition in the UK parcels market.

GLS, the 501-year-old firm’s overseas division, completes its trio of main business segments. Royal Mail is expanding its international reach into the US, last year buying Golden State Overnight Delivery Service, which operates across several western states.

Overseas results contrasted with the UK. Revenues rose by nine per cent on an underlying basis to £2.5bn. Operating profits jumped 17 per cent to £196m.

"We have made good progress against all of our strategic priorities,” said Greene. One of these is the decision to close the firm’s mammoth pension scheme.

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Currently in a surplus, the cost of keeping the scheme open is estimated to spiral to an unaffordable £1.2bn a year.

Negotiations with unions to find a “third way” are understood be ongoing. The threat of industrial action is hanging over Royal Mail, analysts said.

“There are still risks in agreeing new pension arrangements,” said Khoo.

​RBC Capital Markets analyst Damian Brewer said: “We see likely better investor interest to come as key wage/pension issues get settled.”

Shares jumped almost four per cent in early trading this morning before falling back, ending the day up one per cent.

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