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What’s next for International Distribution Services shares after Royal Mail woes?

International Distribution Services’ share price lost almost 60% of its value in 2022, as Royal Mail’s problems intensified, leading to calls for the UK postal service to be restructured. Royal Mail was hit by a major cyber-attack in January, causing major disruption to its international services, while an ongoing dispute with postal workers could lead to further strike action.

Royal Mail’s parent, International Distribution Services [IDS], saw its share price lose close to 60% of its value in 2022, as Royal Mail’s problems intensified, leading to calls for the UK-based postal and courier service to be restructured.

The beleaguered Royal Mail was hit by a major cyber-attack in January, causing major disruption to its international services, while an ongoing dispute with postal workers – which led to 18 days of strike action in the second half of 2022 – means the threat of further strike action lingers, and even the possibility of bankruptcy has reared its head.

There’s no escaping that IDS – which also owns the successful General Logistics Systems (GLS) operation based in Germany – faces a number of issues, and a share price that has fallen some distance from its former highs. So what lies ahead for the company and its troubled Royal Mail unit?

How has the IDS share price been performing?

International Distributions Services’ share price was one of the biggest losers on the FTSE 350 last year, falling over 60% at one stage as the stock sunk to a 52-week low of 173.65p on 14 October, before clawing back a portion of those losses, as the shares climbed back above the 200p level in November. IDS shares ultimately recorded a 56.78% annual decline.

So far this year, despite the ransomware attack, IDS stock has continued to consolidate, rising 8.36% year-to-date into Friday 27 January’s close at 230.80p. The shares have risen 32.91% off the year low in October, but they are still 49.06% below the February 2022 52-week high at 453.10p.

Royal Mail woes keep pressure on IDS share price

Soaring inflation has intensified the pressure on Royal Mail, in turn limiting the IDS share price. The cost of living crisis has led to a fall in parcel deliveries, and sparked strike action among a disgruntled workforce seeking improved pay and terms, with the threat of further strikes in the coming months, as talks between management and the Communication Workers Union fail to make a breakthrough. In last Thursday’s nine-month trading update, IDS said strike action had hit the company to the tune of around £200m.

As if things weren’t bad enough, the major ransomware attack that has had a damaging effect on Royal Mail’s overseas operations, with UK residents still unable to post letters or parcels abroad, though the company has been able to resume some international deliveries. The fallout is likely to last for several months.

The upheaval has hit Royal Mail’s status as a passive income stock, with the hit on its balance sheet and cashflow set to affect any potential dividend payments, especially with profit likely to remain elusive in the near term. The economic downturn is only compounding the company’s bleak near-term outlook, and is likely to limit IDS share price’s upside potential.

Royal Mail restructure on the cards?

There has even been some talk of Royal Mail falling into bankruptcy, but the company will hope that prospect can be avoided, possibly through the breakup of the GLS and Royal Mail businesses.

A possible spin-off of GLS could release funds for Royal Mail to be restructured but would “significantly dilute the value available for shareholders from GLS,” according to the Liberum Capital analyst, Gerald Khoo. This prospect is unlikely to appeal to IDS shareholders.

In last week’s update, IDS said Royal Mail would suffer a loss of between £350m and £450m for the current financial year, assuming there’s no further strike action. The company is aiming to return to profit in its 2024-25 financial year.

What are analysts forecasting for IDS stock?

Liberum — along with Deutsche Bank — have a ‘ sell’ rating on IDS shares, as the risk of prolonged unprofitability, an uncertain company outlook, and the current macroeconomic difficulties hit confidence in the stock. Bernstein analyst, Alex Irving, said the latest forecasts for Royal Mail look “overly optimistic” in the face of likely further industrial action, reported the Financial Times.

The 13 analysts offering 12-month IDS share price forecasts have a median target of 250.00p, with a high estimate of 410.00p, and a low estimate of 115.00p, according to the FT. The median estimate represents a potential upside of 8.32% compared with last Friday 27 January's close at 230.80p. Analysts have, not surprisingly, become more pessimistic on IDS stock. Currently, there are two ‘buy’ and two ‘outperform’ recommendations, alongside seven ‘hold’, one ‘underperform’, and two ‘sell’ recommendations, for a consensus ‘hold’ verdict.

 

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