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Postal group also warns investors the UK business could lose money next year
Thursday, 21st November 2019, 2:16 pm
Shares in the postal service plunged by as much as 16.7 per cent in early trading, but have since recovered slightly and were down around 14 per cent at 1.30pm.
Investors were given a fright after the group said its UK business could make a loss in the next financial year, due to revenue and cost headwinds as well as significant investment by the company.
Strike action
While Royal Mail hailed its best UK sales performance for the “past five years”, it warned the outlook for its letters business is “challenging”.
The delivery giant saw revenues rise 5.1 per cent to £5.16bn in the half year to the end of September, while pre-tax profit leapt to £173m, up from a £33m for the same period last year.
‘Economic and political uncertainty’
Group chief executive Rico Back said the company’s profitability has been “in line with expectations for the half year, despite considerable UK economic and political uncertainty”.
The company said revenues from its letters business are the “best in five years” but still reported a 1.4 per cent decline in the division.
It also cautioned that a slump in business confidence is expected to have an impact on letter volumes over the next year.
Parcel revenues more than offset the decline in the letters arm, with sales increasing 5.6 per cent on the back of a 5 per cent jump in parcel volumes.
Fewer letters posted
Mr Back said: “People are posting fewer letters and receiving more parcels. We have to adapt to that change. The challenging financial outlook in the UK means now, more than ever before, we need to make the changes required – and accelerate them – to ensure a successful UK business.
“We remain committed to investing £1.8bn in our transformation. We want to change, working with our unions, but we can only do so through an affordable resolution.”
Last week, the firm won an injunction from the High Court to block potential strikes by postal workers but the CWU has said it will appeal against the decision.
In its half-year report, the company said that “industrial action, or the threat of it, can only hurt our company, and our colleagues”.
It added: “That is because, in today’s postal market, our customers have choices. Consumers can send a text or email when they would once have written a letter; and shippers can choose from a wide range of delivery companies, not just Royal Mail.”
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: “We’ve always known Royal Mail faced an uphill struggle, as people and businesses send fewer and fewer letters and delivery companies jostle for position in the growing parcel business. Unfortunately the group’s key weapon against those headwinds seems to have misfired badly.
“Royal Mail‘s investment case always rested heavily on the argument that years of public ownership had left the group bloated, under-invested and with lots of low hanging efficiency savings to harvest.”
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