Delivery service Royal Mail (RMG) fell 6.9% to 167.5p as it scrapped two years of dividends and announced a management restructure that will impact around 2,000 jobs. The drastic action on costs was unveiled to address the ‘immediate impact’ of Covid-19, as the company reported falling revenue and profits.
Royal Mail reported pre-tax profits, to 29 March 2020, down 25% to £180 million, while the company also admitted that to lower revenue for the first two months of the current year.
Dividends for last year to 29 March 2020 and this (to end March 2021) have been axed, with the board hoping to restart shareholder payouts in the 2021/22 fiscal year.
SLOW TO ADAPT
Interim executive chair Keith Williams admitted that Royal Mail has been slow in evolving to meet changing market dynamics, saying that in recent years, ‘our UK business has not adapted quickly enough to the changes in our marketplace of more parcels and fewer letters. Covid-19 has accelerated those trends, presenting additional challenges.’
The company announced a three-step plan which is expected to result in a £130 million saving in people costs next year and flat non-people costs, along with a reduction of around £300 million in capex across the group over the next two years.
Royal Mail said that the largest reductions will be in senior executive roles and non-operational functions.
TRADING GETTING WORSE
In its annual results for the full year ended 29 March 2020, Royal Mail provided a trading update for the first two months of 2020/21 and reported revenue was down £29 million year-on-year, as addressed letter revenue fell 23% and volumes were down 33%.
Operating profit fell £108 million year on year in current trading, while total costs rose £80 million driven by costs related to social distancing measures, high levels of absence and protective equipment.
Royal Mail set out two scenarios for how the business could perform in 2020-21 and said that assuming a UK GDP decline of 10% and Covid-19 restrictions continuing to ease post June, revenue would be £200 million to £250 million lower year-on-year, with £140 million of additional costs related to Covid-19.
Should UK GDP decline 15% Royal Mail revenue will be £500 million to £600 million lower year-on-year, with £155 million of additional Covid-19 related costs.
MISSED OPPORTUNITY
AJ Bell investment director Russ Mould said: ‘Fundamentally the company has been too slow to adapt to the shift from letters to parcels.
‘It is possible to imagine an alternate reality where Royal Mail floated in 2013, quickly saw the structural growth opportunity for parcels from online shopping, adapted and invested accordingly and is now a thriving business at the nexus of a rapidly growing e-commerce market.
‘The acceleration in this trend due to the pandemic might even have had a net positive impact.
‘Instead, due to issues like poor industrial relations, uneven management and inefficiency, it remains a bit of a dinosaur.’
