What Royal Mail PLC’s Investment Plans Mean For Earnings Growth

Today I am looking at the implications of Royal Mail‘s (LSE: RMG) latest transformation plan.

Streamlining package to boost earnings

Royal Mail is having to undergo massive restructuring in order to adapt to the changing ways in which customers use the country’s oldest mail service. A backdrop of rising parcels demand and collapsing letter volumes — combined with intensifying competition from the likes of TNT Post UK — is forcing the firm to undergo significant reshaping in order to remain profitable.

Indeed, just last month Royal Mail announced plans under its rolling efficiency drive to axe 1,600 existing jobs — mainly centred on group management — and create some 300 “new or enhanced roles.”

The measures, which are expected to result in annualised cost savings of £50m, will push the cost of Royal Mail’s efficiency programme to royal mail£230m for the current year, up from its previous estimate of £160m.

The company said that it was in consultation with the Communication Workers Union (CWU) and Unite over the plans, although the move has again raised the spectre of possible industrial action following a less-than-enthusiastic response from Unite in particular.

Royal Mail and its unions hammered out a deal with CWU members to avert a staff walkout back in February, after nine-tenths of the union’s members accepted the company’s pay, pensions and job security proposals.

However, the potential for strike action has always been a bugbear for Britain’s premier courier, and the prospect of walkouts could affect Royal Mail’s transformation plans looking ahead.

Stunning growth on the horizon

Newly listed Royal Mail is expected to print maiden earnings of 31.8p per share for 2014, results for which are due on Thursday, May 22. And City brokers expect growth to rattle along at a canter over the medium term, with a 33% expansion next year expected to be followed with a 17% increase during 2016.

These projections leave the courier changing hands on P/E multiples of 13.3 and 11.4 for 2015 and 2016 respectively, comfortably surpassing a forward average of 19.5 for the entire industrial transportation sector.

And price to earnings to growth (PEG) readouts of  0.4 and 0.7 for these years illustrate the firm’s exceptional value for money — any reading below 1 is generally considered exceptional bang for one’s buck.

Although Royal Mail could face significant headwinds in the form of fresh industrial action in coming years, I believe that the firm’s transformation package is essential in allowing it to stay ahead of the pack in its core home markets. With activity at its GLS division on the continent also rattling along nicely, I believe that Royal Mail is in great shape to enjoy robust growth over the long term.

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Royston does not own shares in Royal Mail.