The reorganisation of Royal Mail continues with asset stripping high on the agenda, but will staff be next?

17th November 2014

Alastair McCaig, market commentator at IG Group discusses the outlook for Royal Mail ahead of its results on this week…

On Wednesday 19 November, ahead of a busy Christmas period, Royal Mail is due to post its first-half figures. Markets are expecting the company’s adjusted earnings per share to have increased from 9.5p up to 14.8p. Sales are called a little softer, dropping from £4.936bn to £4.509bn. Cost-cutting and improvements in margins however, should see the company’s pre-tax profits more than double from £86m up to £199m.

It has now been just over a year since Royal Mail started floating on the stock exchange, having been priced at 330p for its IPO and jumping to 455p at the close of the first day’s trading some of political furore has now died down.  The attractiveness of an index beating yield derived from the guaranteed spring dividend of 13.3p saw institutional appetite drive the shares up to 615p in the first three months on the stock exchange.

All of this initial appetite was always tempered with the knowledge that the Royal Mail would need to make considerable changes to its business model in order to improve its competitiveness.

Improvements have been made with cutting costs and asset stripping however the elephant in the room “staff” has not been fully addressed. One statistic highlights how much more is still needed in order to ensure that the business is as streamline and competitive as possible. On average, the parcel delivery sector attributes staff as 45% of its total running costs. With Royal Mail, staff account for 60% of the company’s running costs.

The government still owns a 30% stake in the company and for political reasons would be reluctant to see the Royal Mail embark on the cost-cutting exercise that would bring it in-line with its competitors. One of the requirements of the IPO has been that the Royal Mail maintains a certain standard of letter delivery service and the government’s stake will enable them to more directly over see this being the case.

The run up to year-end is a not unexpectedly a particularly busy time for both the letter and parcel departments of the business and will offer markets an ideal opportunity to measure the improvements made against their more direct competitors.  Although not an outright liability the letter delivery arm of the business does not offer the same room for growth in either volume or margin that parcels do and as such will come under far greater scrutiny.

These questions that continue to hang over the Royal Mail have seen the majority of institutional analysts keep the company on a “hold” rating. Market expectations that pre-tax profits are set to double have encouraged IG traders to position themselves 83% long of the company. Shares are above the IPO price and the first day’s closing price too, however, at 460p they are still some 150p off year highs. In order to see bullish momentum return, an outline on future cost cutting measures will no doubt be one of the specifics investors will want to see.


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