Stock Watch

Royal Mail share price boosted by revenue surge

CMC Markets

This year’s economic lockdowns have made Royal Mail an unlikely winner in the pandemic lottery. The Royal Mail share price rose 5% on Thursday morning, sitting at over 300p after the company's half-year results announcement, setting a new high for 2020.

The Royal Mail share price had been recovering steadily since it's record low of 120p in April, however it still remains short of the 2013 IPO price of 330p.

Increase in revenue boosts Royal Mail share price

The rise in the Royal Mail share price comes as the company announced a surge in revenue, but a slide in profits.

First-half revenues increased by 9.8% to £5.67bn, however due to a sharp rise in costs the business slumped to an operating loss of £20m. This was driven largely by Covid-19 related costs of £85m, as well as other business costs, including voluntary redundancy of £147m. Profits before tax came in at £17m, down over 90% from a year ago.   

The performance in its GLS division also saw an increase in revenues of 21.7%, helping push operating profits in this area up to £166m, a rise of 84%.

Letter volume drops again, parcels compensate

One of Royal Mail’s many problems in the past has been its higher cost base relative to its peers as well as its loss-making letters division, and today’s latest numbers have served to highlight that particular problem.

Addressed letter volumes were down 28%, with total letter volume down 33%, with adjusted operating losses here coming in at £180m, and revenues falling by 20.5%, however parcel volumes more than compensated with a rise of 31%, and a rise in revenues of 33.2%.

In terms of guidance, management nudged revenue expectations for the rest of the year upwards by £380m to £580m, however costs could also increase as well. Management also reserved the option to reinstate the dividend sometime next year, after cancelling the 7.5p dividend earlier this year.

Looking to the future

Now that Rico Back has departed as CEO, management now has the opportunity to re-engage with the workforce and help push through further efficiencies to make Royal Mail work practices more in line with the 21st century. 

Management have said that talks with the CWU are encouraging in this regard when it comes to dealing with the upcoming challenges of an uncertain outlook for Q4, though Q3 appears to be going well so far. We’ve already seen some innovative thinking in this regard with the rolling out in October of the new collection from home service, which allows customers to have their parcels collected from as little as 72p.

The outlook for the business is much more positive now, with the company recently competing with Amazon for a £550m one-year contract to deliver 215,000 Covid-19 testing kits a day in the UK, as part of 'Operation Moonshot' .