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Royal Mail PLC Down As Parcels Revenue Fails To Deliver

Royal Mail (LSE: RMG) this morning published its results for the half-year to 28 September. Its share price opened almost 2% up on last night’s close, but has since fallen back to stand just over 8% down.

The company has reported revenue growth of 2%, in line with expectations. However, whist revenue in its General Logistics Systems (GLS) business was up 7%,  its UK Parcels, International and Letters (UKPIL) revenue was flat, with that from the parcels element falling 1%, despite a 2% growth in volume.  

Royal Mail blames the fall in parcels’ revenue on a combination of a change in its service mix and the highly competitive nature of the UK parcels market. More specifically, it says that it expects Amazon’s own delivery network to limit the annual rate of growth in the UK addressable market to 1-2% for around the next two years

Pre-tax profit (excluding specific items) was down almost 6.5%, at £218m, with reported group operating profit (before transformation costs) falling 20%, down to £279m from £353m in the first half of last year.

Earnings per share (excluding specific items) dipped 3% to 16.3p, and Royal Mail’s board is recommending a maiden interim dividend of 6.7p per share for the half year.

The company also warned that there is an “urgent need” for a new regulatory framework for its “Universal Service” obligation, under which it is required to deliver to every home in the UK for a fixed price — an obligation by which it is bound until 2021.

Royal Mail says unless the current framework is revised, it faces the prospect of “rapid growth of direct delivery competition“, with new entrants to the market able to cherry-pick the services they offer.

Commenting on the results, CEO Moya Greene said:

I am pleased with our overall performance. We have delivered two per cent revenue growth together with margin expansion, in line with our expectations. Our tight cost control meant that UK costs were flat on an underlying basis and we are expecting a similar performance for the full year. Looking further ahead, we are targeting a flat or better underlying UKPIL cost performance in 2015-16.

“Our performance remains in line with our expectations for the full year. But, as always, this depends on us delivering another great Christmas, for which we are fully prepared.”

At 455p, Royal Mail’s share price is still up around 37% on its launch price of 330%. However, it’s now around 25% down on the peak of over 600p seen at the beginning of this year.

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Jon Wallis has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.