19th May 2022 10:51
(Alliance News) - Shares in Royal Mail tanked on Thursday with investors worried its stellar performance during the virus pandemic "was merely a mirage".
In the financial year that ended March 27, the postal service registered a 8.8% drop in pretax profit, which fell to GBP662 million from GBP726 million.
In its UK unit, adjusted operating profit jumped 21% with the margin up 90 basis points, but European and North American parcel operation GLS reported a 4.5% decline in profit on sterling terms with a 80 basis points margin drop.
Revenue rose 0.6% to GBP12.71 billion from GBP12.64 billion, with its domestic UK arm registering a 1.6% sales decrease while GLS revenue grew 4.4% in sterling terms.
The company explained that the decline in UK revenue reflected changing consumer behaviour after the lifting of lockdown measures as well as lower international volumes. Royal Mail cited the reopening of non-essential high-street shops, which cut into online shopping.
GLS, on the other hand, benefited from a recovery in business-to-business volumes and freight.
"It shouldn't be a surprise that since the easing of Covid restrictions that parcel numbers have fallen given that lockdown restrictions over the last 12 months haven't been anywhere near as extensive as they were in 2020. There is also the small matter that Covid-19 test kit numbers have also fallen sharply since the end of free testing," said Michael Hewson, chief market analyst at CMC Markets.
Looking ahead, Royal Mail said current adjusted operating profit consensus of GBP303 million sits within a range of potential outcomes but "with downside risk". This would be down sharply on the GBP758 million posted for the recently ended financial year.
Royal Mail shares were trading 13% lower at 296.79 pence in the wake of the results.
"Royal Mail's shares have been on the back foot since last summer, amid fears that the company's performance during lockdown was merely a mirage," said John Moore, senior investment manager at Brewin Dolphin.
Over the past 12 months, the stock has dropped by 43%.
Royal Mail has multiple headwinds to contend with in the year ahead, noting an "uncertain outlook" for economic growth and consumer spending amid a cost of living squeeze, inflation and the war in Ukraine.
On top of this, Royal Mail is locked in talks with the Communication Workers Union over pay. It had tabled an offer worth up to a 5.5% raise or CWU grade colleagues, but this was rejected by the union, which has threatened industrial action.
"This does not necessarily mean there will be industrial action. We want to reach agreement with CWU, but industrial action, or the threat of it, is damaging for our business and undermines the trust of our customers," said Royal Mail.
AJ Bell's Russ Mould said the current inflationary backdrop threatens to "unpick" the progress made by the company since the start of the pandemic.
"Pay increases can't hope to keep pace with rising prices and demands for more flexibility from staff, including working Sundays, are unsurprisingly going down like a lead balloon," he said.
"Chief Executive Simon Thompson seems to be deliberately raising the stakes – describing the transformation of the company 'at a crossroads'. The direction it takes next could determine whether the privatisation will ever be considered a success, particularly for long-suffering shareholders."
By Lucy Heming; [email protected]
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