The nation’s major courier service, Royal Mail Group, unveils its half-year results on Thursday, hoping that the numbers will deliver. However, could the threat of strikes and its recent dividend cut overwrite the message?
Denial of Christmas strikes improves Royal Mail’s share price
In 2013, Royal Mail stepped into the stock exchange for the first time. At 330p a share, the stock was considered to be highly undervalued, as much as 9%. Since reaching the 600p a share region in 2014 and again 2018, the company has failed to reach such heights. However, there seems to be a positive change in Royal Mail’s share price. The company was recently granted a high court injunction to prevent Christmas strikes after 97% of the Communication Workers Union voted for the proposed walkouts. Royal Mail’s share price immediately rose 1.4% to 230p a share – reaching a six-month high. The success of the injunction could continue to aid Royal Mail’s share price.
Can delivery targets affect Royal Mail’s share price?
In May, Royal Mail cut its dividend to free up £1.8bn over five years, as management deal with the problem of higher costs on its profit margins. The company’s plan was to invest this money back into its postal services, and it appears the investment is starting to pay off. The latest quality of service report has shown that Royal Mail has surpassed its annual regulatory targets for first and second-class mail in the first half of the financial year 2019-20, improving on the previous year when it slipped below its first-class mail target at 91.5%. The latest data shows Royal Mail delivered 93.3% of first-class mail the next working day, against its regulatory target of 93%. The target to deliver second-class mail within three working days at 98.5% was also exceeded, with 98.8% being delivered within this timeframe. This provides evidence that Royal Mail’s investment efforts to improve its postal services are working.
Letters lost but parcels received
The last annual results showed Royal Mail’s revenue jump to £10.172bn, up from £9.776bn, was driven by its parcel services – with parcel revenue growing 4% and parcel volumes up 5%. On the other hand, letter revenue declined by 4%, with letter volumes down 5%. With management in a state of disillusion, mixed with the age of electronic communication, it isn’t hard to grasp why the letters division isn’t succeeding. In response to this, Royal Mail continues to capitalise on its growing sector of parcel deliveries. Around 1,400 parcel post-boxes have been introduced across the UK, which allows sellers to post pre-paid parcels – the first major change of the use of post-boxes since their introduction 160 years ago. The continuous exploits to further improve the parcel delivery service could help to increase Royal Mail’s profits, and overall share price.
On Thursday morning, we’ll find out whether Royal Mail is on course to meet its profit targets of £300m-£340m. The general consensus for Royal Mail’s net profit in the current year to March 2020 stands at £240m, comfortably shy of its target. Even though revenue has continued to grow, any further profit downgrades could have a negative effect on Royal Mail’s share price.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.