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What’s happening with Royal Mail shares?

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Royal Mail (LSE: RMG) shares have been on a volatile journey since the company was privatised in 2013. Investors that bought the shares from day one might be disappointed with its performance so far. The current price is trading at just under the initial public offering price of 330p.

However, the Royal Mail share price has made some strong gains over the past few months. The share price has more than doubled since April, and it’s currently up almost 25% since the start of the year.

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Despite the decent performance so far this year, I think Royal Mail shares are cheap and still worth a look.

Transforming for a brighter future

Royal Mail has a rich 500-year history and has undergone several transformations during that period. Today, it is transforming to adapt to the changing demands for postal services in the UK. This includes new innovations, products, and services. For example, it recently started a parcel collection service from homes nationwide.

In addition to driving growth, Royal Mail is also undergoing several measures to reduce costs and improve efficiencies. These measures should help to create a profitable, cash-generative, and sustainable business over the coming years.

Royal Mail’s most recent modernisation and transformation is in its early days, in my opinion. If management plans work out over the coming months, holding Royal Mail shares could reward patient shareholders in 2021 and beyond.

Parcels overtake letters

Investors of Royal Mail shares may have welcomed the publication of its half-year report that showed revenue growth of nearly 10%, driven by strong parcel growth.

For the first time, revenue from parcels is now larger than revenue from letters. The growth in online shopping during the pandemic accelerated trends that were present pre-pandemic.

Parcels revenue now represents 60% of total revenue, compared with 47% in the prior period. I’d say this trend is likely to continue and parcel revenue could see further growth over the coming years. At the same time, the number of letters being sent by Royal Mail continues to decline.

Despite strong parcels revenue, it wasn’t enough to prevent a sharp drop in profits. Pre-tax profit fell 90% to £17m. Costs increased in 2020 with £85m of costs related to Covid-19 and £147m for voluntary redundancies.

Royal Mail also owns an overseas company called General Logistics Systems (GLS). GLS offers parcel and logistics services throughout Europe, the United States, and Canada. This division has performed well in 2020. It’s encouraging to see that revenues rose 22% and operating profit jumped 84%.

I reckon it must be a tough business to be in, moving letters across the country for a fixed price. Especially in an age of technological advancement that is reducing the demand for posted letters. The Postal Services Act 2011 guaranteed that Royal Mail would provide this service until at least 2021.

My view is that the trend of more parcels and fewer letters is here to stay, and with the company’s plans to improve efficiencies and modernise, I’m putting Royal Mail shares on my watch list.

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Harshil Patel 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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