Can Royal Mail owner IDS turn itself around?
Royal Mail owner IDS needs a Christmas miracle and more.
Losses are widening for the group, badly burned by heavy strike action and reputational damage as uninspired posties crawl between doors.
It is now on a drive to send its flagging fortunes in the opposite direction, calling for “urgent reform” of its service obligation after trebling losses to £319m in the first half of the year.
But IDS is yet to face the test of Christmas and, even passing that, it faces a long upwards slog next year.
Today IDS lowered its full year guidance, pushing shares a bit further into the red. It now expects operating profit to just about break-even despite a former positive forecast.
Coffers are currently dry as Royal Mail had to pay out redundancy costs and they are only going to be drained further by a recent pay deal agreed with the Communication Workers Union. Over the past year Royal Mail has faced severe industrial action over pay and working conditions.
So the board has decided to withhold an interim dividend, although it expects to be able to pay a “modest” dividend from General Logistics Systems (GLS), also owned by IDS, at the full year.
It may go some way to alleviate investor fretting but Royal Mail will not be able to fund the group dividend until it returns to a positive cash flow.
Can it turn things around?
Royal Mail business
Ofcom has just hit the national post service with a £5.6m fine due to delivery deadline failures. IDS is now pleading with the regulator to relax Royal Mail’s delivery duties.
The courier said it is “simply not sustainable to maintain a network built for 20 billion letters when we’re now only delivering 7 billion”.
But it begs the question why there is a painfully slow pace of delivery if far fewer letters need to be sent.
Things started to go wrong for IDS in 2022 in a post-pandemic comedown.
Shares have fallen ingloriously since the company’s peak price per share of £5.91 in summer 2021. It now lies under half of that at £2.37, although this is a slight uptick from last September.
Alternative services like Evri and DPD have tightened their grip on customers as they capitalise on steep volume declines as well as Royal Mail’s sluggish shift to digital and low level of customer satisfaction.
Sarah Riding, supply chain partner at London based law firm Gowling WLG reckons IDS can turn its fortunes around.
She told CityAM: “Despite letter volumes falling, the spike in online shopping in recent years gives an opportunity, but IDS needs to distinguish itself from competitors who have gained ground.
“If the company can focus on its delivery targets and customer service, then it will be able to redeem its reputation and get back on top.
“The upcoming Christmas period will be a marker for IDS of where it currently stands against its competitors and will highlight where the business still needs to improve to start delivering once again,” Riding added.
GLS business
IDS could be banking on parcel courier GLS to be its golden goose.
Amsterdam based GLS operates internationally and has generated solid profits. It made £150m in the first half of this year, some £12m lower than in 2022, while revenue surged six per cent this half to £2.3bn.
“New CEO Martin Seidenberg may argue the group has two businesses with real potential but only its international delivery arm GLS is really demonstrating any of said potential,” said Russ Mould, AJ Bell investment director.
IDS named Martin Seidenberg, previously GLS boss, as its new chief in July.
“Whether Seidenberg can deliver where his predecessors have failed in transforming Royal Mail or whether he can execute a spin-off which makes it somebody else’s problem, allowing him to focus on the profitable and cash generative GLS division, remains to be seen,” said Mould.
GLS may be safe for now but it is struggling to offset loss-making sibling Royal Mail, not pulling its weight in the IDS family.
Head of equity research at Hargreaves Lansdown, Derren Natha believes an IDS turnaround is possible.
But he told CityAM: “There’s a huge job to do to win back customer confidence, and investing in this upfront means that profitability will continue to be hit.
“There’s a lot of work going on behind the scenes to restore the public’s faith in Royal Mail, and a faultless execution of Santa’s delivery list will be important to rebuilding trust.
“It may be worth it if it pays off in the long run, but it might be a nervous wait.”