Could Royal Mail’s share price deliver again in the next 12 months?

THE John Lewis and Marks & Spencer Christmas ads are out a little earlier than usual and having the desired effect as retailers are already reporting that this year’s Christmas shopping has started early. It seems consumers are, as anticipated, stocking up well ahead of the traditional festive rush amid warnings that supply chain disruptions could leave this year’s Christmas ‘must haves’ out of stock.

The festive season is always big business for retailers, so this will come as welcome news for them. But with the shift to online shopping, the already busy delivery industry could see all their Christmases comes at once this year, as consumers shop online in droves.

Giving its now customary bi-monthly trading update Royal Mail (RMG) said at the latest one in mid-September that the number of domestic parcels it is handling is “significantly higher” than pre-pandemic; up by around a third.  It says its domestic parcel volume are 34% higher than in the same five months to August in 2019, pushing domestic parcel revenue up by 44.5% year on year.

As the original go-to for postal deliveries Royal Mail says it is managing to maintain its market share, no mean feat in a now highly competitive sector and one in which the domination of digital communication had also largely sounded the death knell of the humble hand-delivered letter. That has forced a sea-change at the 505-year-old group, principally from a company that delivers letters to one that delivers parcels; all turbo-charged by the pandemic.

Its ability to keep up with progress means the Royal Mail is still the UK’s largest logistics company, but that doesn’t mean it doesn’t have its own on-going pressures.

International deliveries are proving problematic, as a result of reduced air freight capacity and a rise in costs, causing a lag in overall profitability from that side of the business. But on the domestic front the costs of running its services is also increasing, with the intense competition for staff meaning costs are likely to be higher this year. There is also pressure to find sustainable options, which also requires investment.

However, Royal Mail said it expects its adjusted operating profits and margins to accelerate in the second half of the year. It expects “further normalisation” as customers settle into a post-pandemic world but for now it anticipates a boost to profits in the second half of its current financial year.

Royal Mail’s shares have risen 60% in the last 12 months. Could they do that again?

Royal Mail’s half-year results are due out on Thursday.

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Five year performance

Past performance is not a reliable indicator of future returns

Source: FE, total returns as at 10.11.21