Royal Mail shares set to rise as it pivots to parcels
Royal Mail has struggled to adjust to falling letter volumes, but despite the postal service expecting to report a ‘material loss’ this year, its decision to pivot towards prioritising parcel deliveries is beginning to pay off.
- Royal Mail shares jump 25% as revenues rise from parcel deliveries
- The British postal service still expects to report a ‘material loss’ this year
- Royal Mail admits it is ‘failing to adapt’ fast enough in latest trading update
Royal Mail shares skyrocketed 25% on Tuesday, with investors reacting positively to signs its turnaround strategy is beginning to have some success, after the company reported a ‘substantial shift’ in its business from letters to parcel deliveries.
In its latest trading update, the British postal service reported a 34% increase in parcel volumes in its first five months to 30 August, with over 177 parcels delivered, helping revenues jump 33.1% year-on-year.
Royal Mail closed at 218p per share on Tuesday, with the stock down just 6% year-to-date, which is better than the broader market with the FTSE 250 down 20% over the period.
Royal Mail ‘failing to adapt’ despite positive signs
The strong growth in parcel volumes is being driven by B2C and e-commerce, Royal Mail said in its AGM trading statement.
‘Whilst this has driven better than expected revenues, as discussed previously, our legacy in letters has held back operational changes needed to adapt our business to a market that has fewer letters and more parcels,’ the company said.
Royal Mail forecast to report ‘material loss’ this year
Despite positive signs that its turnaround strategy is seeing results, Royal Mail admitted that it is still on track to report a ‘material loss’ this year, as letter deliveries continue to fall and costs of doing business rise due to the coronavirus pandemic.
‘As a result, the mix shift from handling more parcels and fewer letters increased costs in the period by £85 million,’ the company added.
‘In addition, costs related to Covid-19 (elevated absence, social distancing, additional protective equipment and other costs) were £75 million in the first five month.’
Royal Mail looks to overhaul ‘outdated working practices’
In an attempt to streamline its business and reduce costs, Royal Mail said that it is in talks with unions about replacing ‘outdated working practices’, with plans to end workers signing in by hand and sorting parcels manually.
Earlier this year, the company said it plans to cut 2000 management jobs, which could save the company around £130 million.
Thankfully, the British postal service was able to upgrade its guidance for this year, with the company expecting revenue growth of £150 million, up from its earlier forecast in June where it projected a decline of up to £250 million.
The recent share price surge is encouraging news for its management team and their turnaround efforts, but a myriad of challenges remain for the struggling postal service that could derail its recent success.
Royal Mail: key figures
- Parcel volumes up 34% (177 million more parcels) and revenue up 33.1% year on year.
- Addressed letter volumes (ex. elections) down 28% (1.1 billion fewer letters)
- Letter revenue down 21.5%
- Total revenue up £139 million
How to trade stocks with IG
- Create an IG trading account or log in to your existing account
- Enter ‘Royal Mail PLC’ in the search bar and select it
- Choose your position size
- Click on ‘buy’ or ‘sell’ in the deal ticket
- Confirm the trade
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
Act on share opportunities today
Go long or short on thousands of international stocks with spread bets and CFDs.
- Get full exposure for a comparatively small deposit
- Trade on spreads from just 0.1%
- Get greater order book visibility with direct market access
See opportunity on a stock?
Try a risk-free trade in your demo account, and see whether you’re on to something.
- Log in to your demo
- Take your position
- See whether your hunch pays off
See opportunity on a stock?
Don’t miss your chance – upgrade to a live account to take advantage.
- Trade a huge range of popular stocks
- Analyse and deal seamlessly on fast, intuitive charts
- See and react to breaking news in-platform
See opportunity on a stock?
Don’t miss your chance. Log in to take advantage while conditions prevail.
Live prices on most popular markets
You might be interested in…
Find out what charges your trades could incur with our transparent fee structure.
Discover why so many clients choose us, and what makes us a world-leading provider of spread betting and CFDs.
Stay on top of upcoming market-moving events with our customisable economic calendar.