Royal Mail – Recovery Signed, Sealed And Delivered

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Royal Mail PLC (LON:RMG) reported a 7.1% year-on-year increase in first half revenues, reaching £6.1bn. That reflects good growth internationally, a modest recovery in UK letters and growth in UK parcel revenues.

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Underlying operating profits came in at £404m, up from £37m a year ago, as the group saw the benefits of past restructuring efforts, increased automation and easing COVID restrictions.

The group announced an interim dividend of 6.7p per share. Royal Mail also announced plans to return £400m to shareholders, with a £200m buyback and £200m special dividend.

Royal Mail shares rose 6.1% in early trading.

Royal Mail's Turnaround

Nicholas Hyett, Equity Analyst at Hargreaves Lansdown:

“The pace of Royal Mail’s turnaround has hugely impressed, leaving the group in very real danger of becoming an attractive business.

It would be easy to put the current windfall down simply to the effect of the pandemic on parcel demand. And that has played a part. But ramping up facilities to cope with the extra demand is no small achievement, and a quick glance under the hood shows a business which is in far better shape than before the pandemic. Overall the group is driving higher volumes with lower costs – doing wonders for margins.

Nowhere is that better illustrated than in the progress the group has made on automation. Back in 2018-19 just 12% of parcels were sorted automatically, today that’s more like 50% despite a huge uplift in parcel volumes, and the group has ambitions of hitting 70% in the not too distant future. Automated parcel sorting is more cost effective, but also improves quality and provides the extra flex needed to deal with peaks and troughs in demand.

The vastly improved fundamentals have led management to start handing cash back to shareholders – while still paying down debt and increasing capital expenditure. If the current rate of progress can be maintained that‘s a trend that could continue. However, we think the second half of the year will be crucial in demonstrating the group’s long term potential. Year-on-year revenue growth will get more challenging as the group laps Christmas in lockdown, and inflation could also offset planned cost savings. If Royal Mail can weather those headwinds the future looks brighter than it has in years.”

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