What next for Royal Mail’s share price?

ROYAL MAIL (RMG) has had some tough issues to contend with of late. First the explosion in home shopping pitted it against what must have felt like a million-and-one far nimbler newcomers, all threatening to steal a march on its doorstep delivery monopoly. That the pandemic struck and proved to be something of a lightbulb moment for the 500-year-old company, which then realised it had to adapt in order to survive, was definitely a good thing.

Group revenue for the year to March was 0.6% higher year on year at £12.7 billion. However, maybe Royal Mail was a little too hasty. Revenue from its UK postal service dropped 1.6% year-on-year as delivery volumes fell as the pandemic and its stay-at-home restrictions eased. And now that £400 million that had been returned to shareholders, via a special dividend and share buyback, maybe looks a tad over-generous. And has triggered another problem – strike action.

Trade union Unite has called strike action on the back of Royal Mail’s plans to cut 700 jobs and reduce its members’ pay by up to £7,000. Chief executive officer Simon Thompson’s “short-term” bonus of £142,000 did not go unnoticed and nor did the 3.6% rise in his basic annual salary to £543,750 in April. Royal Mail stands accused by Unite of “putting profits and dividends for the few… ahead of its duties as a public service”.

Royal Mail has said it has offered its workers a 5.5% pay rise, but in return it wants to implement changes such as moving more parcels and introducing more flexible working patterns. It says it needs workers’ cooperation to grow and remain competitive in the industry.

So far, the two sides have reached stalemate though and the first day of strike action is also the day that Royal Mail is due to give its first quarter trading update. The group missed its annual profits target last time around but had said it could meet 2022-23 market expectations of UK adjusted operating profits of £303 million if it reaches a deal with the union in line with its current offer and avoids a strike.

Expect next week’s trading update to be accompanied by more cost-of-living talk. Royal Mail has already pointed to “significant headwinds”, namely the effects of declining parcel volumes, rising wage, energy and fuel costs and falling consumer confidence. It has also said parcel demand in the UK fell 7% last year and it expects “a slowdown in volume growth and margin pressure in 2022-23”.

Broker UBS has downgraded Royal Mail to neutral from buy and slashed its price target to 280p from 420p. HSBC though maintains its buy rating, but has trimmed its price target to 604p from 667p.

Royal Mail’s Q1 trading update is due on 20 July.

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