Royal Mail shares fall as it warns investors that tougher competition will hit parcel revenues

22nd July 2014

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Royal Mail has warned investors that earnings from its UK parcel business are likely to be lower than expected this year as a result of stiffer competition.

In the group’s latest interim management statement, published today, it said that over the three months to 29 June, parcel revenues dropped 1% compared to the same period in 2013.

Following the market update, by 09.11am, shares in the business which only came to the market last October were down by 7p, or 2%, to 459p.

The delivery business said changes to Amazon’s minimum order level for free delivery and the expansion of the online giant’s own network have hit market volumes.

In addition it admitted that competition has intensified more than expected, with many firms aggressively cutting their prices in a bid to up their market share. It added that the continued strength of sterling as well as the rising competition in the export market would impact export parcels revenue for the rest of the year.

Despite the headwinds, Royal Mail’s chief executive officer Moya Greene said the group was still expecting to hit its anticipated annual performance.

She said: “Given the increasing challenges we are facing in the UK parcels market, our parcels revenue for the year is likely to be lower than we had anticipated. However, through cost control measures and with continued good letters performance we expect to be able to offset the impact on profit such that our overall performance would remain in line with our expectations for the full year.

“Our parcels revenue will be dependent on our performance in the second half, which includes the Christmas trading period, and on no further weakening in our addressable UK parcels market.”

Letter volumes however decreased by 3%, which was better than an expected annual decline range of 4-6%, mainly due to the improvement in UK economic conditions. In addition, letter revenue was up 3%, benefiting from the impact of price increases and the uplift from the elections traffic.

Commenting on Royal Mail’s update, Graham Spooner, investment research analyst at stockbroker The Share Centre, said: “This morning’s trading update revealed a mixed bag of fortunes for Royal Mail. Investors will be concerned to see parcel deliveries, which account for the largest part of Royal Mai’s business, perform weaker than expected as the strength of the competition begins to bite. The strength of the sterling also had a negative effect.

“However, surprisingly its letters business is performing better than expected which is a positive. In addition to this, continued cost cutting has helped to compensate for any impact on profits. We currently list Royal Mail as a ‘hold’ as growing competition and current pressures on profit margins remain a concern, however longer term attractions continue for a balanced portfolio.”

Last October Royal Mail’s listing saw its shares priced at 330p. Investors in their thousands ploughed cash into the business which saw the shares rise rapidly, at one point hitting a high of 615p, leading many to accuse the government of selling off the business too cheaply.

But the past six months have witnessed some 22% wiped off the value of the stock on the back of the tougher trading environment. Such has been the controversy around its sale that business secretary, Vince Cable has succumbed to pressure following an abundance of criticism and ordered a review into Government IPOs.

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