Shares in Royal Mail Group (RMG) were the best performers on the FTSE 250 on Thursday, climbing as much as 9% to 311p after the firm posted close to a 10% rise in first half revenues and raised its forecast for full year turnover.
Group revenues increased 9.8% to £5.67 billion in the six months to September, driven by strong parcel growth at both Royal Mail and Global Logistics Services (GLS).
COSTS CRIMPING RETURNS
However, the continued contraction in letter volumes - which dropped 33% in the half - and escalating costs pushed the firm to an operating loss of £20 million and reduced group pre-tax earnings to just £17 million against £173 million a year ago.
The Royal Mail business saw a 4.9% increase in turnover to £3.83 billion but racked up combined operating losses of £180 million against a year-ago profit of £25 million, due to the drop in letter volumes together with hefty charges for the virus (£85 million), voluntary redundancy (£147 million) and international conveyance (£32 million).
In contrast, GLS notched up a 21.7% increase in revenues to £1.87 billion and a 84.4% increase in operating profits to £166 million thanks to ‘exceptional’ UK parcel volumes, driven by customers shopping online during lockdown, and improved performances in France, Spain and the US.
MORE WORK TO DO
Chief executive Keith Williams was frank about the challenges facing the business: ‘Whilst we have done exceptionally well in terms of revenue and have seen real growth for the first time since privatisation, as anticipated the reduction in letter volumes has had a significant impact on the regulated business which lost £180 million in the first half, and demonstrates the need for change in the Universal Service.’
In order to create a sustainably profitable UK business, management layers are being reduced and investment is being directed towards areas which will improve efficiency and generate a quick payback. According to Williams, ‘these initiatives should add to top line growth and generate a saving of around £330 million in operational costs’.
HIGHER REVENUES
Finishing on a positive note, the firm said it now expects Royal Mail’s full year turnover to be between £380 million and £580 million higher than last year. This is a major step up from its September forecast of an increase of between £75 million and £150 million.
Moreover, if revenues hit the top end of its raised forecast, Royal Mail itself ‘would be better than break even at adjusted operating profit level’.
