Royal Mail shares plunge after delays in transformation plan

Shares in Royal Mail have dived after it warned that the company’s transformation programme is “behind schedule”, despite improving profits and revenues over the past six months.

The delivery giant’s shares slid 16.7% to 192.4p in early trading after it also cautioned investors that its UK business could make a loss in the next financial year.

It also fired a warning shot to unions over the continued threat of strike action, saying industrial action “can only hurt” the company.

The firm updated investors over the performance of the business just a week after it secured an injunction to block postal workers from taking part in strike action.

In the trading update, the London-listed company warned that the UK division could be loss-making in the 2020-2021 financial year, due to revenue and cost headwinds as well as significant investment by the company.

However, Royal Mail hailed its best UK sales performance for the “past five years” but warned the outlook for its letters business is “challenging”.

The delivery giant saw revenues rise 5.1% to £5.16 billion in the half year to September 29.

Meanwhile, it jumped to a £173 million pre-tax profit, up from a £33 million profit for the same period in 2018.

Group chief executive Rico Back said the company’s profitability has been “in line with expectations for the half year, despite considerable UK economic and political uncertainty”.

The company said revenues from its letters business are the “best in five years” but still reported a 1.4% decline in the division.

It also cautioned that a slump in business confidence is expected to have an impact on letter volumes over the next year.

Parcel revenues more than offset the decline in the letters arm, with sales increasing 5.6% on the back of a 5% jump in parcel volumes.

Mr Back said: “People are posting fewer letters and receiving more parcels. We have to adapt to that change.

“The challenging financial outlook in the UK means now, more than ever before, we need to make the changes required – and accelerate them – to ensure a successful UK business.

“We remain committed to investing £1.8 billion in our transformation. We want to change, working with our unions, but we can only do so through an affordable resolution.”

Last week, the firm won an injunction from the High Court to block potential strikes by postal workers but the CWU has said it will appeal against the decision.

In its half-year report, the company said that “industrial action, or the threat of it, can only hurt our company, and our colleagues”.

It added: “That is because, in today’s postal market, our customers have choices. Consumers can send a text or email when they would once have written a letter; and shippers can choose from a wide range of delivery companies, not just Royal Mail.”

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: “We’ve always known Royal Mail faced an uphill struggle, as people and businesses send fewer and fewer letters and delivery companies jostle for position in the growing parcel business.

“Unfortunately the group’s key weapon against those headwinds seems to have misfired badly.

“Royal Mail’s investment case always rested heavily on the argument that years of public ownership had left the group bloated, under-invested and with lots of low hanging efficiency savings to harvest.”

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