UK: Royal Mail reveals double profits

Royal Mail joins FTSE 100

Royal Mail joins FTSE 100 - Credit: PA

Royal Mail posted another surge in earnings today, but revealed tougher trading at its parcels business and cautioned over the impact of recent strike fears.

In its first set of results as a listed company, the group revealed operating profits nearly doubled to £283 million for the six months to September 29 from £144million a year earlier, although figures were boosted by £95 million after a VAT credit and lower-than-expected costs of its overhaul programme.

The parcels business saw sales volumes growth grind to a halt as the summer heatwave slowed online purchases, while Royal Mail also said the threat of strike action had since cost it business parcel customers in its key Christmas quarter.

But the group said the recent launch of size-based pricing was offsetting the slowdown in demand and added the spate of energy bill hikes was benefiting its letter business in the second half as providers send out mailings to millions of customers.

Millions of Royal Mail staff and investors will share out a £133 million dividend payout on their shares next July, although Royal Mail confirmed it would only pay a final dividend for this financial year.

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Shares rose more than 4% to 553p after the results, having soared since being valued at 330p in last month’s initial public offer, which saw 690,000 members of the public pick up tranches worth around £750.

Business Secretary Vince Cable initially dismissed the leap as “froth” but they have since held steady at well over 500p.

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Royal Mail’s half-year figures showed underlying pre-tax profits leaping to £233 million from £94 million a year earlier, as revenues rose 2% on a like-for-like basis.

Chief executive Moya Greene returned Royal Mail to profit last year after four years of successive losses, as the company prepared for privatisation.

It has been helped by widespread cost-cutting under its transformation programme, which has seen job losses and the closure of a number of mail centres. It has shut four sites since the end of last March and is planning another four by March next year.

But it admitted the risk of industrial action was seeing business customers switch to rivals in its parcel arm, which it said could see sales volumes remain broadly flat in the nine months to the end of December.

Addressed letter mail fell 6% in the first half of its year, although this was an improvement on the 9% drop a year earlier.

Royal Mail said its parcels business now accounts for more than half - 51% - of group revenue.

Its results are also being driven by a robust performance in its General Logistics Systems (GLS) arm, which operates across Europe and Ireland and delivered an 11% hike in first-half earnings.

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said Royal Mail’s maiden results since privatisation have had a “warm reception, despite increasingly loud whispers of valuation concerns”.

A recent analysts’ note from broker UBS poured cold water on the strong run for Royal Mail’s shares, saying despite its good prospects the stock looked overpriced and targeted a much lower value of 450p.

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