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Royal Mail share price: what to expect from Q1 results

Royal Mail is beset by a host of challenges as it prepares to release its full-year results, with a 60% drop in the share price confirming the bearish sentiment towards the firm.

When is Royal Mail’s earnings date?

Royal Mail reports earnings on 22 May, covering its financial year to the end of March 2019.

Royal Mail earnings – what does the City expect?

Royal Mail is expected to report pre-tax profit of £342 million, down from £565 million a year earlier. Revenue is expected to rise slightly, to £10.5 billion, from £10.2 billion a year earlier. It has beaten revenue forecasts in three of the last five updates.

A 60% decline in the shares of Royal Mail since the peak in May of 2018 confirms that investor sentiment towards the firm is not exactly buoyant. Over the same time, the FTSE 250 is down almost 8%, but this represents a recovery from the loss of almost 20% seen at the end of December. For Royal Mail, the losses have been relentless – since the beginning of the year the FTSE 250 is 11% higher, but Royal Mail has still shed 14%. For a firm to underperform the index so impressively underscores how poor its performance has been and how great the worries about the outlook are.

The shares are now undeniably cheap – at just 9.3 times forward earnings, below the levels seen in 2017, but this valuation should not be used blindly. Earnings are expected to decline sharply in the coming year and remain low until 2022. Net profit has halved since the initial public offering (IPO) in 2013, while operating profit is down by over 60%. Investors need to see evidence of a sustained turnaround in performance, and at present one seems unlikely.

It continues to suffer from the decline of letter-writing, as everyone uses email and text messaging, while parcel services are ten-a-penny across the country, providing a host of alternatives for firms looking to ship goods. The situation is expected to get worse – the new chief executive officer (CEO) has said that letter volumes will fall quicker than the previous forecast of 4%-6%.

As well as a weakening business outlook, the firm faces the problem of having to raise costs at its business-to-business parcel delivery service in order to cover rapidly-increasing costs – this will hit competitiveness with other firms and potentially reduce market share.

Royal Mail’s dividend

Then there is the problem of the dividend. Current free cash flow, around £200 million, does not cover the dividend, meaning that the payout is coming from cash reserves, an unsustainable proposition in the long run. The slump in the share price has driven the yield higher, to an eye-watering 10.2%. Such a payout seems tempting, but as we have seen recently with Vodafone, a high yield creates the risk that the firm will reduce the dividend, since it will still leave the yield at an attractive level for income investors but also reduce the burden on cash reserves.

However, with the business outlook tough, the yield is one of the few reasons left for anyone to buy the shares. Any hint of a cut in the dividend has been poorly received. Cut the dividend, and yet another reason to hold Royal Mail shares goes by the board.

The discussion about Royal Mail’s shares been floated too cheaply, which dominated in the months after the IPO, is now a distant memory. Indeed, a forward price-to-earnings (P/E) ratio of 9.3 might seem to even overrate the outlook, with fresh falls in the P/E likely.

How to trade Royal Mail’s annual results

The slump in Royal Mail’s shares has been accompanied by declining volatility. The 14-day average true range (ATR) has fallen to 7.2p, a third of the high seen in October when the price dropped from 450p, and also around half the level of late January, when the latest warning prompted another gap lower.

Of the 16 analysts covering the company, there are only two ‘buy’ recommendations, but seven ‘holds’ and seven ‘sells’, which makes for a bearish outlook. The current target price is 283p, versus the current price of 234p, but even this would only take the price back to the levels of early March.

The average move on results day is 4.3%, but current indications from Bloomberg suggest a move of 9.3% is expected, a notable increase in volatility.

Royal Mail shares - technical analysis

The ongoing downtrend shows no sign of stopping. The price remains solidly below the 50-day simple moving average (SMA), which itself is below the 100-day and 200-day SMAs. Brief near-term rebounds, as seen in January, February, March and April, have provided fresh selling opportunities, and the share price now sits at record lows. The previous lower highs around 270p would need to be cleared to suggest that a short-term rebound is at hand.

Royal Mail: what’s the outlook?

There is very little that can be said about Royal Mail to encourage investors to maintain their optimism. The fundamental business faces huge challenges, as its core letter and parcel divisions see declining activity and increased competition respectively. Meanwhile, the chart remains resolutely bearish, and any rally from the current low levels would more than likely be a fresh selling opportunity.

This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa 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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