Royal Mail to Increase Prices Following Tax Impact, Shares Dip On Write Down (IDS)

Royal Mail has announced plans to increase its prices after incurring a significant financial hit due to a tax change in the UK Budget. The postal service company is dealing with a £120 million impact from the tax raid introduced by Rachel Reeves. This measure notably includes a rise in employer National Insurance contributions (NICs), which has disproportionately affected Royal Mail due to its large workforce of 130,000 workers.

Financial difficulties seem to be mounting for the postal service as its parent company, International Distribution Services (IDS), reported a £134 million writedown in Royal Mail’s value. This development comes in the wake of the National Insurance tax increase. Despite these challenges, Royal Mail has shown resilience by reducing its first-half losses to £67 million, a notable improvement from the previous year’s £319 million loss.

Royal Mail shares, under parent International Distribution Services PLC (LON: IDS) are down almost 1% in trading this morning, dipping 0.97% on the news. Zooming out, and the picture changes, with IDS shares‘ 27.05% gain through 2024 a significant outperformance on the FTSE 100 index’s 4.51%.

Encouraging signs are evident as revenues for Royal Mail grew by close to 11%, reaching £3.9 billion, primarily driven by a rise in parcel demand and a 13% increase in letter revenues. As the cost of redundancies is removed from its balance sheet, the company is poised to return to profitability.

IDS’s chief executive, Martin Seidenberg, has expressed the urgency for reforming Royal Mail’s universal service obligations. The tax raid has served to highlight the pressing need for changes due to mounting costs and a lack of flexibility. IDS itself has seen a considerable turnaround with an operating profit of £61 million in the first half of the year, contrasting sharply with a loss of £169 million in the same period the previous year. The overall revenue for IDS has also jumped by nearly £500 million to £6.3 billion.

However, not all sections of IDS are faring equally well. The European parcels business, GLS, faces profitability issues amidst economic and regulatory uncertainties. In the background of these financial gains and operational challenges, the impending takeover of Royal Mail by Daniel Kretinsky looms large. Valued at £3.6 billion, this deal is undergoing ministerial scrutiny as the historic postal service transitions into foreign ownership for the first time.

Royal Mail’s path forward involves navigating these tax-related financial impacts and adapting its service structure while moving under new ownership. The announced price increases may be a crucial step in managing the financial fallout and ensuring the company’s sustained operations and service delivery. Customers and stakeholders will be watching closely to see how these factors influence the future of one of the UK’s most enduring postal services.