Royal Mail faces the Christmas test
The Christmas period is always a busy period for delivery companies and this year won’t be any different. Just over a month ago Royal Mail shares hit their lowest levels since the IPO in 2013, below 390p, due to competition concerns eating into their margins.
Since then the shares have bounced back quite strongly after the announcement of the sale of its Paddington site to property group Great Western Developments for £111m, with another £20m if planning permission is granted.
This sum was way above market expectations and has raised the prospect that similar asset sales from assets like the Nine Elms site could yield similar premiums, as the company explores plans to either develop the site or put it up for sale with sums in excess of £600m being touted.
This unexpected windfall is likely to help boost the head room on Royal Mail’s balance sheet and put it in a better position to compete in what is likely to be a competitive Christmas season.
We’ve already seen the company cut its prices for parcel deliveries over the Christmas period between the periods of October 20th to January 18th, while in October the company announced that it would be recruiting 19,000 people between November and January to help with the increase in volume of Christmas cards and presents.
The explosion in on-line retailing, click and collect delivery and the use of mobile apps this year is likely to see fierce competition between logistics providers with UK Mail, UPS and Fedex likely to provide plenty of competition, while the recent tie-up between Amazon and Connect Group to provide a 24 hour service for parcel delivery to selected local locations, like underground stations, newsagents and shopping centres, could make a significant dent in Royal Mail’s revenue particularly since Amazon is Royal Mail’s largest parcel customer.
This will inevitably place greater focus on Parcelforce’s volumes, as more and more people choose to pick up their parcel at a location more convenient to their day to day needs.
While Royal Mail’s share price has made a decent recovery from recent lows, the challenges remain as significant as ever, their property portfolio notwithstanding.
Consensus projections for March 2015 and 2016 are for £9.5bn and £9.6bn on the revenue front and £447m and £511m on the pre-tax profits front. This highlights the continued readjustment of investor expectations with respect to the competition challenges facing the industry, and Royal Mail in particular, which is still required to deliver to areas in the UK that most private companies would deem unprofitable.
This pressure on margins could well be a drag on the share price, particularly at a time when management are looking to grow the dividend from its current 3%, to 4.4% in 2015 and 4.7% in 2016. Of course the property portfolio could well come to the company’s rescue in this regard particularly if estimates of its value come in at the top end of expectations.
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