21st Jul 2015 10:20
LONDON (Alliance News) - Royal Mail PLC on Tuesday said its revenue was flat in the first quarter of its current financial year, with a good performance in its parcels and logistics businesses but weaker revenue from its letters business.
The FTSE 100 postal service operator said its group revenue for the three months to June 28 was flat. Royal Mail said revenue in its UKPIL division, which covers its UK parcels and letters delivery business, was down by 2%, as revenue in its UK parcels arm rose by 2% but revenue from its letters business fell by 4%. UK parcels volume rose by 3% in the quarter, while letters volume fell 5%.
Royal Mail said the performance for its parcels division was partly gilded by weak year-earlier comparatives, but said volumes were higher in the quarter on the back of continued growth in low average unit revenue parcels and by a 20% increase in volumes for Parcelforce Worldwide, its smaller express parcels business.
The company said parcel revenue only rose by 2% in the quarter, however, trailing volume growth due to the continued competitive pricing environment in all segments, particularly in Parcelforce Worldwide and for export parcels.
Meanwhile, addressed letters revenue fell by 5% in the quarter, excluding the impact of mailings related to the May General Election in the UK, which is in line with Royal Mail's forecast for a 4% to 6% decline per year.
Total letter revenue fell by 4%, with election mailings offsetting the core decline. Royal Mail said it has seen some signs of downtrading, along with declines in its higher average unit revenue products. This partially offset the impact of letter price increase implemented in January and March.
Revenue in its GLS pan-European logistics business was up by 8%, however, on the back of 9% volume growth, ahead of Royal Mail's expectations. The good performance was driven largely by a continued strong performance in Italy and an improvement in Germany.
Royal Mail warned, however, that margins in its GLS arm could take a 50-100 basis point hit this year from the changes to minimum wage legislation in Germany.
Royal Mail said its outlook remains unchanged for the full year and said its performance will be weighted to the second half, with a dependence on the important Christmas trading period. It added it will retain a focus on cost-cutting measures.
"In the first three months of our financial year we have seen a continuation of the overall market trends we saw last year. We have benefited from the parcel initiatives that took effect in the second half of last year and a good performance from GLS. Our trading environment remains challenging, and we are stepping up the pace of change to drive efficiency, growth and innovation, while maintaining a tight focus on costs," said Moya Greene, Royal Mail's chief executive.
Cost-cutting has been central to Royal Mail's strategy in recent years, as it works to improve its profit margins in the face of falling revenue from its core letters and parcels businesses. In its last financial year, to March 29, it posted higher pretax profit on the back of a 20 basis point improvement in its operating margins.
Brokers said the trading update from Royal Mail was broadly in line with forecasts, as the good performance in the GLS business offset continued sluggishness in its letters business.
GLS outpaced forecasts for both Berenberg and Investec, and the latter said it does not think Ofcom's recently-announced review into the regulation of Royal Mail will result in any substantive changes to the current regime. Both brokers kept Buy ratings on Royal Mail, with Berenberg's price target at 625 pence and Investec's at 580p.
Royal Mail shares were down 0.4% at 509.63p late morning Tuesday.
Cantor Fitzgerald, however, warned that the investment case on Royal Mail is "finely balanced". The broker said that while Royal Mail's valuation looks attractive, it its forecasting only minimal growth over the next few years as the company grapples with stiff price competition in its UK parcels business and the decline of its core letters division.
The trading update from the postal service operator comes after Ofcom, the UK media and communications regulator, last week outlined the scope of its review into the regulation of Royal Mail, including whether any price controls should be imposed on the company given the lessening of competition in the postal services market.
Ofcom said in June that it had widened its review of the regulation of Royal Mail in light of the decision by competitor Whistl Ltd to halt its own direct delivery services in the UK. It said at the time that it would look at whether the commercial flexibility Royal Mail was given following the last regulatory review in 2012 was still appropriate and whether any pricing controls should be imposed.
The publication of the scope of the review, issued on Friday last week, confirmed that this remains on the table as an option, with Ofcom saying it will examine whether Royal Mail's wholesale costs and retail prices are affordable and sufficient to cover the costs of the universal service and whether the company's commercial flexibility remains appropriate within the changing market, including whether wholesale or retail charge controls may be appropriate.
The review also will examine whether any changes to the current postal regulatory framework could be appropriate in order to maintain the universal postal services and will study how to ensure Royal Mail continues to become more efficient given the absence of any significant end-to-end competition for the letters market.
Ofcom expects to complete its work and to have any revised regulatory framework put in place in 2016.
By Sam Unsted; [email protected]; @SamUAtAlliance
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