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Poor parcels and letters performance weighs on Royal Mail

market relief

market relief

It’s business as usual at Royal Mail after group revenue ticked up by 2% to £10.2 billion.

The group’s continental business, GLS, continues to be the best performer, while UKPIL trundles along. Revenue at GLS jumped by 10%, while UKPIL saw no revenue growth.

The British division has always lagged behind its continental counterpart because it must deliver to all parts of the UK, no matter how remote. UKPIL anticipates no change in parcel revenue next year. The company predicts a decline of between 4% and 6% in letter volume in the medium term, and this ties in with the wider trend.

Full-year adjusted profit before tax ticked up by 1.2%. The company is aiming to trim costs by £230 million next year, but it also warned that transformation costs would be at the upper end of the forecast of £130-£150 million. Royal Mail operates in a low margin industry, and keeping costs down is crucial. Investors will be keeping an eye on the bottom line in the year ahead.

The company’s balance sheet is improving. Last year it had a net debt position of £338 million, and this has now swung to a net cash position of £14 million. Investors are happier when a company has a comfortable cash position as it gives management breathing space. 

In November the firm announced a 4% increase in first-half dividend, and today it revealed a final dividend of 16.3p, bringing the total payout for the year to 24p, a 4% increase. The consistent dividend policy throughout the year suggests the business is stable, and will reassure investors.   

Royal Mail was given a boost in March when it re-entered the FTSE 100. The top-flight index projects a positive image, and demand for the stock will be higher on account of tracker funds. From a psychological point of view, it is heading in the right direction.

At the back end of last year the company received a tax boost from closing its pension scheme. Industrial relations at the company are improving after management and the main union agreed to introduce a collectively defined contribution pension scheme. If the deal is successfully it is likely to boost investor confidence, as it would be more cost-effective for the company and it would keep the bulk of staff on side.

The share price has been in a solid upward trend since November 2017, and if the bullish moves resumes, it could retest 632p. Support might come into play at 547p.

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