Royal Mail owner IDS results come with considerable uncertainty, but rebound expected ahead

Results for Royal Mail owner International Distributions Services PLC (LSE:IDS) on Thursday 18 May come with “considerable uncertainty”, says UBS, though the past year is predicted to be the low point for earnings. 

As well as the potential distraction from the rumoured departure of chief executive Simon Thompson, analysts at the Swiss bank said they expect the investor focus to be on whether the Royal Mail UK business is losing meaningful market share due to the 18 days of strikes since last summer and the level of cost savings management expect to deliver if workers vote in favour of the deal recently agreed with the Communication Workers Union (far from certain, according to insiders).

Furthermore, how is international arm GLS doing, following a 2% decline in parcel volumes and 1% in profit margins in the first three quarters of the year? 

For the past year to March, UBS is expecting it to have finished with a damp squib of a fourth quarter, with UK domestic and international parcels down 18% and 20%, with a 13% decline in letters, while a GLS decline in volumes is offset by a rise in price mix.

IDS management’s guidance for an adjusted EBIT loss of £350-450m “should benefit from lower wage inflation” than previously thought, but the analysts still said they are taking a conservative view and assuming the UK division lost circa £450mln before redundancy costs, with a group loss of £120mln, excluding redundancy costs.

The wider City median forecast is for a £105mln loss.

Looking ahead to the new financial year, UBS sees “significant uncertainty in both revenues and potential cost savings which leaves a wide range of outcomes possible” for group profits.  

UBS is forecasting a return to profit for 2024 for the group of around £113mln, helped by a £190m UK revenue improvement to reflect the recovery of most of the revenues lost during the past year’s strikes, “but no meaningful growth on top”, while expecting difficulty for Royal Mail raising UK domestic parcel prices given the disruptions to service caused by the strikes (and the cyber attack).

It will not by much easier for GLS either, with profits expected to fall due to the difficult demand environment persisting in the first half and risks of downside in North American freight.