Royal mail owner IDS’ share price is up 13% since June — can the rebound continue?

Royal Mail owner International Distribution Services’ (IDS) share price has delivered investors a healthy return over the past month. After a series of disruptive strikes, IDS finally struck a deal with the Communication Workers Union over pay and working conditions. With that out of the way, the hope is that the group will swing back into profit, having taken a battering in its last set of results.

• IDS share price up over 13% since the start of June.
• End to strikes could provide IDS with much-needed stability after months of volatility.
• Forecasts are for revenue and earnings to grow over next couple of years.

International Distribution Services’ [IDS] share price has gained over 13% since 1 June. The stock hit a high of 231.11p in intraday trading on 4 July. While IDS’s share price has softened slightly, closing Friday 7 July at 222.1p, it is trading in a different class to May, when it slumped over 22%, to end the month trading just under 200p.

Still, over the past 12 months the stock has slipped 18% and is trading below a 260p year-high, hit in intraday trading on 25 April. This could signal that, despite the recent upswing, the stock is trading at a discount.

How is IDS performing?

IDS’s share price slump in May can partly be blamed on the publication of a bruising set of annual results.

For the 52 weeks ending 26 March, IDS reported a group operating loss of £748m, down from a £577m profit in the same period the previous year. Royal Mail posted an operating loss of £1.04bn, having made a £250m profit the previous year. Logistics business GLS delivered a £296m profit, down from £327m.

On an adjusted basis Royal Mail’s operating losses totalled £419m, down from a £416m profit. IDS blamed this on industrial action, inability to deliver proposed in-year cost saving, and fewer Covid-19 test kits being sent.

Prior to the results in May, it was announced that Royal Mail CEO Simon Thompson would be stepping down in October. Thompson’s two-year tenure at Royal Mail was marked by strikes and fractious dealings with the Communications Workers Union (CWU).

Thompson said: “now is the right time to hand over to a new CEO to deliver the next stage of the company's reinvention”. Symbolically, at least, the departure of Thompson could represent a fresh start for Royal Mail, after a bumpy 12 months.

Can IDS’s share price rebound?

There’s no getting away from the fact that it’s been a tough time for IDS, but that doesn’t mean that the future has to be a second-class experience for shareholders.

A deal with the CWU over pay and working conditions was reached in April. Under the deal’s terms, Royal Mail staff will receive a 10% pay rise and a £500 one-off payment. The deal still needs to be ratified by union members, but it’s a positive development considering strike action has not only caused volatility in IDS’s share price, but contributed to hefty losses.

Progress has also been made on IDS’s five-point turnaround strategy. A 10,000 reduction in headcount at the end of March 2023 exceeded a 5,000 target and should deliver £150m in benefits for 2023-24.

IDS said that it expects to see a significant year-on-year improvement in the second half of its 2023-24 fiscal year “due to revenue recovery and efficiency initiatives as well as lapping main impacts of industrial disruption”.

For the 2024-25 period, the group is targeting a return to adjusted operating profit for Royal Mail before voluntary redundancy costs.

According to data from Simply Wall Street, IDS is expected to grow earnings and revenue by 113.6% and 3.6% per annum respectively. Earnings per share is forecast to grow 111%, while return on equity is predicted to be 8.4% in three years.

The hiring of a new CEO and an agreement with the unions should help IDS focus on getting back to profitability. But there’s still a long way to go before it starts delivering for its shareholders.

IDS’ share price has a 245p, 12-month median price target from analysts tracking the stock. Hitting this would see a 10.3% upside on Friday’s close.