Royal Mail improves profitability whilst big investors do their sums

Royal Mail’s first set of figures as a private company are likely to provide yet more impetus for its soaring share-price. The new Royal Mail Group saw a mild increase in revenues and a stronger growth in profits with its performance confirming the emerging dominance of the e-retailing driven parcel business.

For the first six months of 2013 Royal Mail saw a 2% increase in revenue and a near doubling of operational profit from £144m to £283m. The picture around operating profits was complicated by the extensive ‘transformational’ restructuring that Royal Mail is engaged in. This cost £70m over the half-year yet this figure was £120m less than in the same period last year, therefore flattering the company’s income.

The performance of the business was also slightly complicated with the core ‘UK Parcels International and Letters’ increasing revenue by 1% year-on-year but more than doubling profits. Not only is this due to the changing ‘transformational costs’ picture but it also obscures the divergence between the parcels business which saw revenue grow by 9% and the letters business which  experienced an underlying fall in revenue of 3%. To make things even more complicated, parcel volume was roughly static with the increase in revenue being driven by the effects of “size-based pricing”.

The European parcel carrier GLS performed well with revenue up 6%, volumes up 6% and operating profit 11% on hardening margins despite very mixed economic conditions in its continental European markets.

Royal Mail is focussed on changing itself into an effective parcel company whilst managing the decline of its mail business. The path that the company has chosen is to focus on smaller packages that can be delivered easily through its existing ‘last mile’ network, which is the reason that it introduced its ‘size-based pricing’ model which Royal Mail’s management believes will enable it to dominate the 1 kilo or less segment of the parcel market. In parallel it is introducing ‘click and collect’ services through the Post Office network despite these now being a separate company to the Royal Mail.

The situation concerning Royal Mail’s corporate finances remains febrile. For not only is there continuing noise about the undervaluing of the sale of equity in the business by the British Government but there are also rumours that some of Royal Mail’s new share-holders are exploring the potential of the rationalisation of property holdings through options such as sale and lease-back. Some large London hedge funds have invested heavily in Royal Mail and may be looking to flex its finances as a means to improve asset utilisation.