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Will Royal Mail shares maintain their bullish trend in 2021?

The Royal Mail share price has risen by 175% since September 2020. Will this so-called 'golden period' for Royal Mail shares last beyond lockdown, and what can new CEO Simon Thompson do to modernise and maintain growth?

  • Operating profit of £580 million mooted by analysts
  • The Royal Mail share price almost quadrupled since April 2020
  • Modernisation programme still essential to future-proof services
  • Looking to trade Royal Mail shares? Open an account today

The value of Royal Mail (RMG.L) shares is almost four times higher than its lows of 124.30p in early April 2020, with parcel volumes throughout the Covid-19 pandemic soaring to unprecedented levels.

The share price growth in December 2020 and February 2021 also reinforced the bullish nature of Royal Mail shares, with the speed of the recent gains taking many analysts by surprise.

Will the future be delivered in a parcel?

During the fourth quarter (Q4) of 2020, Royal Mail delivered 496 million parcels – an all-time record for the company. However, the number of letters delivered fell by 14% for the same quarter. The November 2020 lockdown fuelled notable change in the way the Royal Mail service was utilised across the country.

The consumer shift towards the world of e-commerce and online shopping has resulted in ‘challenging circumstances’ according to Keith Williams, the chair of Royal Mail’s board. Williams added that the company was making ‘encouraging progress’ to meet the demand for parcel deliveries.

Subsequently, the group now anticipates operating profits for the year to be ‘in excess’ of £500 million, with some analysts like Jefferies predicting an operating profit of £580 million, which is some 60% higher than its pre-Christmas forecast. It would also represent a 78% year-on-year (YoY) increase on 2019.

Will 10,000 temporary workers handle unprecedented demand?

Perhaps the most encouraging vote of confidence in Royal Mail’s short- to medium-term future is its decision to retain 10,000 of the 33,000 temporary staff employed during the hectic Christmas season.

The group’s willingness to take on a third of its temporary workforce is a testament to its desire ‘to innovate and reshape itself’, according to Julie Palmer, the Regional Managing Partner at Begbies Traynor. However, Palmer warns that the next 12 months under the leadership of the new Chief Executive Officer (CEO), Simon Thompson, will be critical for the company’s long-term stability.

What challenges does new the CEO face with modernising Royal Mail services?

Simon Thompson assumed the helm of Royal Mail last month and he has a big job on his hands to maintain the positive momentum of the last 12 months. Thompson’s mission will be two-fold: deliver a modernisation programme which future-proofs the service, while maintaining good relations with trade unions.

Thompson recently brokered the agreement with the Communication Workers Union (CMU) on the employee pension scheme. Ofcom has also paved the way for Thompson to cut the working week for employees by one hour, which was approved by the CMU in December. This could yield cost savings of £225 million per annum. Driving down operational costs and maintaining efficiencies could have a positive knock-on effect for Royal Mail shareholders.

Will the Royal Mail share price scale heights not seen since September 2018?

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1 Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
2 Deal three times or more in the previous month to qualify for our best rate.

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.

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