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Why the Royal Mail share price is rocketing on Thursday

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The Royal Mail (LSE: RMG) share price is surging on Thursday following the release of its half-year report. The UK share is up 6.3% at pixel time, making it the biggest riser on the FTSE 250 so far today. Earlier in the session it was trading at its most expensive since November 2018, above 310p per share.

Britain’s oldest courier has rocketed in value thanks to news that parcel volumes at home and overseas have raced ahead in recent months. The news meant that adjusted operating profits sailed past City forecasts. And it’s a release that confirms the brilliant profits opportunities that the fast-growing e-commerce segment offers.

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Parcels leap at Royal Mail

Revenues from the UK share’s domestic parcel operations soared more than a third (33.2%) in the 26 weeks to 27 September, to £2.3bn. The impact of Covid-19 lockdowns in driving online shopping helped supercharge packages traffic. Volumes at Royal Mail rocketed 31% year-on-year to a whopping 806m parcels as a consequence.

This helped to push total revenues at Royal Mail 4.9% higher to £3.83bn.

The parcels business is now worth more to Royal Mail’s top line than its traditional letters operations. While package revenues soared in the first half, turnover from letters slumped 20.5% to £1.53bn. Parcels now account for 60% of group revenue, versus 47% for letters.

Overseas success

Royal Mail was also able to grab a slice of booming e-commerce activity on mainland Europe and North America in the first half. Revenues at its General Logistics Systems (GLS) arm flew 21.7% higher on-year to £1.87bn, while volumes rose by a similar percentage to 387m parcels. Strong trading here contributed to Royal Mail smashing broker forecasts for the March-September period too.

At group level, revenues at Royal Mail jumped 9.8% year-on-year to £5.67bn. Adjusted operating profit slumped 77.6% because of increased costs due to Covid-19 and the cost of dealing with higher parcel volumes. Still, profit of £37m for the first half smashed City predictions by a considerable distance.

For instance, experts at UBS had forecasted adjusted operating profit of just £9m. Yet this was one of the more bullish forecasts put out before Royal Mail’s release.

Investing for the future

It’s probable those first-half results have raised optimism over Royal Mail’s transformation programme to capitalise on the e-commerce surge. This programme should drive down the costs associated with manual parcel sorting and deliver a packages service more sorted for the 21st century.

Royal Mail has invested in four new parcel-sorting machines, the first of which will become operational in late spring. And its Parcel Collect service, which collects packages directly from customers’ front doors, is now available nationwide following recent successful trials.

City analysts expect this UK share to record an 82% drop in annual earnings this fiscal year (to March 2021). But it’s expected to bounce back with a 370%-plus increase next year.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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