Royal Mail (RMG), a British postal company, announced its full-year results recently. Along with the results, the company announced a five-year turnaround plan, running till 2023-24. The company plans to deliver an adjusted operating profit margin of over 4 per cent in 2021-22, driven by a parcels-led strategy which is more balanced and has more diversified international exposure. By 2023-24, the company seeks to deliver an operating profit margin of over five per cent.
In the latest filing, the company said that the new transformation plan would focus on improving service, efficiency and productivity. To achieve this target, the group would focus on targeted investments, a range of new, digitally enabled work tools, and productivity initiatives. To better position the company for a future dominated by online deliveries, the turnaround plan focuses on expanding the parcel business internationally, with a plan to expand its General Logistics Systems (GLS) unit into parcels from one country to another. The unit will work with Royal Mail International to improve its export offering outside the UK and has a target to earn about 4.5 billion euros in revenue in 2023-24. In 2018-19, the unit earned 3.3 billion euros.
The company had been reviewing operations and testing new delivery methods as consumers are making a move away from sending letters towards online shopping. The market has also been disrupted by e-commerce giants like Amazon. In an apparent effort to adapt to this change, the company has planned to introduce about 1,400 parcel post-boxes across the UK, which will have wider openings to accommodate packages.
To fund the new five-year turnaround drive aimed at securing the future of the 500-year-old organisation, the company said it would cut its dividend for 2019-20 to 15 pence per share from 25 pence declared in FY2019, slashing its dividend by 40 per cent. Over the next five years, the company will invest GBP 1.8 billion alongside the GBP 2.1 billion invested in the UK since 2013. Above annual ongoing capital expenditure of around £400 million, the company would invest GBP 400-500 million of incremental cumulative gross capital expenditure every year till 2023-24.
Execution risks of the plan would be quite significant and more downside risk to the shares in the short term can be expected as warned by the analysts. Investors were also warned that things would get worse before they got better, putting downside pressure on the stock.
The company’s Chief Executive, Rico Back, admitted the importance of dividends for the shareholders but remarked that it was strategically the right move. The threat of nationalisation is also looming over the company, accentuated by doubts over the future of Theresa May’s fragile premiership.
Share Price Commentary
Daily Chart as at May-28-19, before the market closed (Source: Thomson Reuters)
On 28th May 2019, at the time of writing (before the market closed, GMT 10:45 am), RMG shares were trading at GBX 210.2, down by 0.19 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 529/GBX 192. Total outstanding market capitalisation was around £2.09 billion, with a dividend yield of 11.87 per cent.
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