Thursday 21 November 2019 3:07 pm

Royal Mail shares bleed red as strike threat puts profit in doubt

Shares in Royal Mail plunged almost 18 per cent today after the postal service warned the threat of industrial action could lead to it posting a loss or breaking even next year.

Despite reporting an increase in pre-tax profit for the first half, the company said its turnaround plan is “behind schedule”, denting investor confidence and sending its stock tumbling.

Shares recovered slightly in the afternoon and were trading just over 14 per cent down at 198.50p by mid-afternoon.

The figures

Royal Mail’s pre-tax profit rose to £173m for the first half thanks to increased parcel volumes, and swung to an operating profit of £61m after posting a loss of £4m a year earlier.

Revenue jumped just over five per cent to £5.2bn, Royal Mail’s best UK revenue performance in five years. Strong growth in parcel revenue offset declines in revenue from letters.

Read more: Royal Mail wins High Court injunction to prevent Christmas postal strikes

Read more: Royal Mail wins High Court injunction to prevent Christmas postal strikes

Although the company said letter revenue would be boosted by the upcoming general election, it said the landscape remains “challenging”. It is now expecting a 7-9 per cent decline in letter volume, excluding elections, for 2019-20, and a 6-8 per cent decline the following year.

Royal Mail said it is on track to deliver adjusted operating profit between £300m and £400m for the full year, in line with expectations, but warned that revenue and cost headwinds such as strained industrial relations could result in it breaking even or making a loss in 2020/21.

The company announced an interim dividend of 7.5p per share, down from 8p the year before.

Why it’s interesting
Royal Mail is in the process of implementing a transformation plan outlined earlier in the year, designed to help it adapt to changing consumer habits as letters fall out of favour and demand for parcels increases thanks to the rise of online shopping.

But the service faces stiff competition from courier rivals, and chief executive Rico Back admitted this morning that Royal Mail’s transformation is “behind schedule”.

The group has also been hit by the threat of strike action next month ahead of the General Election and busy Christmas period as the Communications Workers Union (CWU) accuse bosses of failing to fulfil an agreement reached last year over pay and conditions.

The postal service last week won an injunction to prevent CWU members from going on strike in December, but the union launched a High Court appeal against the ruling yesterday.

In comments published alongside the results, Back hit Back at CWU, saying: “Industrial action, or the threat of it, can only hurt our company, and our colleagues.”

What Royal Mail said

“People are posting fewer letters and receiving more parcels. We have to adapt to that change,” said Back.

“Our transformation is behind schedule. We are investing more because of the industrial relations environment, the General Election and Christmas, to underpin our Quality of Service at this key time. This is likely to impact our productivity for the remainder of the year.”

“We want to change, working with our unions, but we can only do so through an affordable resolution,” Back continued. “We have changed many times before. We will do it again.”

What analysts said

Responding to this morning’s results, AJ Bell investment director Russ Mould said investors were “understandably spooked” by Royal Mail’s outlook warning.

“Back’s outlook for the year to March 2021 has sent investors running for cover faster that a postman chased by an angry dog.”

“Royal Mail is blaming the unions, the election and even Santa for having to invest more money because its transformation is behind schedule, but it doesn’t appear to be blaming itself,” said Mould.

Interactive Investor head of markets Richard Hunter agreed, saying: “The reduction in the letters and cards market, largely offset by the explosion of parcel deliveries arising from online shopping, is hardly a new phenomenon.

Hunter said the continued decline in demand for letters represents “proof it were needed that Royal Mail’s business mix needs to change rapidly”.

CMC Markets’ David Madden added that Royal Mail could struggle if it tries to increase automation to better compete against rivals due to its “heavily unionised workforce”.

Read more: Royal Mail says it will prioritise general election post in event of strike action

“Ordinarily a pivot to automation would be welcomed in the free market, but the group is likely to run into industrial disputes should the rise of automation lead to lower head count.”

“Another problem Royal Mail suffers from its that is must offer uniform services across the entire UK, while other delivery companies can choose to focus on more lucrative regions, or offer different pricing structures, which essentially puts them at a competitive advantage,” said Madden.

Main image credit: Getty