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2) Downbeat leadership
Management sought to downplay expectations for a rapid profit recovery. Thompson noted ‘whilst 2021-22 presented operational challenges, with Omicron and elevated levels of absence, we continued to benefit from pandemic tailwinds, which are now dissipating.
Non-executive Chair Keith Williams agreed, noting ‘clear headwinds as we enter 2022-23, such as weakening GDP and growing inflationary pressures.’
The FTSE 100 company has increased its cost-savings program by £60 million to £350 million. But net debt still more than doubled from £457 million to £985 million. And it expects ‘revenue to decline in 2022-23, in particular the first half which has strong comparatives in the prior year, which included a period of lockdown.’
While this negative sentiment could be a tactic to moderate union demands, Brewin Dolphin analyst John Moore thinks ‘Royal Mail’s shares have been on the back foot since last summer, amid fears that the company’s performance during lockdown was merely a mirage.’
However, the company returned £400 million to investors through a share buyback and special dividend, which could add fuel to the current union feud.
3) Union battles
Negotiations between Royal Mail and the Communication Workers Union (CWU) are intensifying. Relations were already tense, as the postal carrier said it would cut 700 management roles in January, alongside the 2,000 axed in June 2020.
Royal Mail believes that ‘in the medium term, we still see potential for a 5%+ margin if we can complete our new pay deal with the union,’ but warned ‘the CWU pay deal is most material in terms of value, with 1% of pay equating to c.£45 million of cost inflation.’
But CWU deputy general secretary Terry Pullinger argues that ‘every single penny of the (adjusted) £758 million profit was…from key postal workers, not by board members and not by shareholders but by our members.’
Royal Mail has offered a 3.5% pay increase, with a further 2% dependent on hitting productivity targets. However, the union is seeking an inflation-based ‘no-strings-attached’ rise. And at 9%, CPI inflation is currently at its highest in more than 40 years.
Deutsche Bank analyst Andy Chu highlights the company is ‘the most exposed to potential consumer weakness’ and that ‘the pay negotiation with the unions could prove challenging in a higher inflation environment.’ JP Morgan analysts concurred in a recent note, arguing that wage negotiations were unlikely to be simple.
A spokesman for Royal Mail said it ‘will retain our place as the industry leader on pay and terms and conditions. We value the work we do with CWU and remain committed to agreeing a deal.’
But with profitability down and inflation raging, a deal the union will consider acceptable could hit Royal Mail shares hard.
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*Based on revenue excluding FX (published financial statements, June 2020).
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