Stock Watch

Will Royal Mail share price keep delivering?

CMC Markets

From a lowest ever trough, to a respectable two-year peak; 2020 has been quite a ride for the Royal Mail share price.

Having hit record lows earlier this year of 120p, the Royal Mail share price has embarked on a steady recovery. The shares currently sit at around 270p, representing a strong turnaround in a challenging six-month period.

Royal Mail share price still short of IPO figure

However, the Royal Mail share price still remains some way short of the 330p achieved on its IPO in 2013. At the time, politicians criticised the government for selling off too cheaply, and while the hugely oversubscribed shares did indeed trade a great deal higher initially, the reality was that they were always way too expensive when compared to other organisations in its sector.

It took a while for investors to wake up this fact, but wake up they did, with the management of the business also playing a part in Royal Mail's share price decline.

Letters in decline, but parcel outlook positive

Royal Mail’s biggest problem has been its higher cost-base relative to its peers, as well as its loss-making letters division. The Covid-19 lockdowns have exacerbated the drop in letters being sent, with some predicting that the number may well have halved.

Parcels on the other hand have the potential to make up for that, now that so much shopping is now done online, and recent predictions are that e-commerce could rise by 35-45% during November, compared with the same period in 2019. Despite this, the growth of parcels is yet to come close to making up the shortfall in letter deliveries.

There may be some forward-thinking needed to help keep the Royal Mail share price on an upward trajectory, and given the increased popularity of online shopping during lockdown, further inroads into the parcel market may please investors. Announced in October, a new collection-from-home service is set to be available six days a week. The service will allow customers to have their parcels collected direct from home, from as little as 72p.

More positive news came after reports Royal Mail would compete with Amazon for a £550m one-year contract to deliver 215,000 Covid-19 testing kits a day in the UK, as part of Boris Johnson’s ‘Operation Moonshot’. News that the company were interested in the contract sent the Royal Mail share price up 8% amid heavy trading volumes.

Challenges part-and-parcel of CEO role

Rico Back’s departure as CEO after under two years in the role came as something of a surprise, after he vacated the role in August. Former British Airways boss Keith Williams has taken the role as executive chairman at Royal Mail, with the hope that future management will re-engage with the workforce and help push through further efficiencies to make Royal Mail work practices more in line with the 21st century.

Questions remain over whether the universal service obligation (USO) of deliveries six-days a week is still economically viable, and whether a further pivot towards parcels is inevitable, and Williams will have much on his plate in guiding the company in challenging times.

What will happen to the Royal Mail share price when the company releases its latest results on Thursday 19 November at 7am?