Royal Mail delivers note of caution as profits jump

Royal Mail yesterday shocked investors with a double warning over competition which took the edge off its double-digit profit rise.
Royal Mail chief executive Moya Greene warned of future headwinds. Picture: Toby WilliamsRoyal Mail chief executive Moya Greene warned of future headwinds. Picture: Toby Williams
Royal Mail chief executive Moya Greene warned of future headwinds. Picture: Toby Williams

In its first full-year results since privatisation, the group said revenues growth from parcel deliveries more than offset a further decline in letter volumes.

But chief executive Moya Greene said the firm faced increased competition in both areas, and the shares fell almost 10 per cent to 519p.

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“We are facing a couple of headwinds,” she said. “The competitive environment on the parcels side is more intense. We are taking steps to remain the leader in this growing market.

“On the letters side, the headwind is direct delivery and we have strategies in place to counter its adverse financial impact. However, without timely regulatory action, direct delivery could undermine the economics of the universal service and our ability to generate sustainably a 5-10 per cent [profit] margin in our reported business.”

Royal Mail is already seeing letters volumes falling at a rate of between 4 and 6 per cent annually as customers switch to e-mail, but it now faces competition from TNT Post. It wants the regulator to intervene because while TNT can cherry pick the more profitable urban areas, the former state monopoly is obliged to provide nationwide coverage.

Royal Mail wants regulator Ofcom to review the industry ahead of its commitment to do so by the end of 2015. Without regulatory action, it estimates direct delivery could impact its revenue by more than £200 million by 2017-18.

Greene said the group was talking to legislators to help garner support for an earlier review and it would submit a report pushing for this to Ofcom in coming weeks.

An earlier move to mitigate the impact of TNT Post’s rollout, through proposed wholesale price hikes, was suspended by Ofcom in April and now faces a review.

Royal Mail’s warnings took the shine off a rise in operating profits, after transformation costs, to £430m in the year to 30 March. That compares to £403m a year earlier. A final dividend of 13.3p per share was recommended.

Nicla Di Palma, equity analyst at Brewin Dolphin, said she was disappointed with the figures, especially as operating margin actually declined from 4.4 per cent to 4.2 per cent.

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She said that Royal Mail remains behind its parcel competitors in terms of technology and TNT’s entry into the direct delivery market in London and Manchester was “very concerning”. “Current earnings expectations are very optimistic, and we believe they will come down after these results,” she said. “Also, the statement about the dividend is concerning.”

Justin Cooper, head of shareholders solutions at Capita Asset Services, was also unimpressed by the dividend. He said: ““Even after the sharp fall in the share price after the results were published, the yield is not attractive compared to the rest of the FTSE 100.

“What’s more, with the management admitting competition is eating Royal Mail’s direct delivery lunch, future profits are at risk. That means future dividends could easily disappoint.”