When I think of postal and delivery service provider Royal Mail (LSE: RMG), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company attractive as an investment proposition.
1) Restructuring programme
The latest shot in Royal Mail’s battle for efficiency is a proposed net reduction of 1,300 in the employee count. The target is low-hanging fruit in the firm’s bloated management space — posties around the country will be heaving a sigh of relief. The move will cost the firm about £100m, but the directors expect the prize to be an annual saving of around £50m so, after two years, the bottom line should start to benefit.
In a change-or-die crusade, Royal Mail is probing root and branch for efficiency savings in all aspects of its business. No dusty corner is likely to remain unspruced up as systems, equipment, operational practices and management all face scrutiny under the spotlight. Total restructuring costs for the year will now be around £230 million.
When such dogged introspection results in a clear willingness to change and adapt in a long-established organisation, the results can be a value-enhancing metamorphosis.
2) Comprehensive operations network
Finger-in-the-air predictions suggest that the parcel market is set to grow over time as internet shopping becomes ever more popular. Royal Mail’s eventual transformation could leave the firm well placed to compete, although there is a lot of competition from other operators. Royal Mail’s natural advantage is its legacy operations network. Other firm’s can only long for the geographical breadth and depth of coverage that Royal Mail inherited at flotation.
Parcel volumes are increasingly important to Royal Mail and now account for around 51% of the firm’s revenue as letter volumes continue to shrink. According to the directors, the firm delivers more parcels than any other in the UK. Sharpening up its operational efficiency could see Royal Mail build on that advantage.
What now?
Royal Mail is transforming its culture and operations to compete, and that’s attractive.
