The owner of Royal Mail’s prediction of breaking even this year, after losses widened in the first half, suggests “deterioration” at the privatised postal service, analysts say.
International Distributions Services PLC (LSE:IDS), the parent company of the postal delivery service, has made a plea to the government for help after its losses mounted in the six months to September.
Chief Executive Martin Seidenberg called for urgent reform after Royal Mail was simultaneously slapped with a £5.6 million fine from Ofcom this week and posted higher losses for the first six months of the fiscal year.
Derren Nathan, head of equity research at Hargreaves Lansdown, said Seidenberg “is finding it harder than first thought to turn round His Majesty’s mail service”, escalating the agenda to relax its statutory duties.
Seidenberg, who is under increasing pressure to turn around the British delivery company, said it is not sustainable to maintain a network built for 20 billion letters when Royal Mail is only delivering 7 billion.
He has promised to hand out a £500 bonus to posties who meet delivery targets this Christmas after Royal Mail was fined for missing last year’s delivery targets.
Earlier this month, Royal Mail also said it would introduce a new service for customers with additional needs.
Royal Mail is targeting a return to profit in 2025 and its parent group has committed to pay a modest dividend for the year that will be funded by sales from its global logistics business.
Analysts say that the fact Royal Mail will not be contributing to the dividend is telling.
IDS said in its results statement for the half year through to 24 September that General Logistics Systems (GLS), its global logistics business, had revenue growth of 5.9% in the first half.
The logistics business posted a weaker adjusted operating profit of £150 million for the half year, down from £162 million a year earlier, which the parent company said was due to “cost pressures” and the impact of strategic investments and “working day effects”.
The parent company’s sales were flat at £5.9 billion in the first half of the fiscal year, as sales growth at GLS offset and buoyed lower volumes at Royal Mail.
Its underlying operating loss trebled to £169 million driven by a widening loss at Royal Mail.
The group downgraded its outlook for the fiscal year, with adjusted operating profit now expected to merely break even.
Analysts attributed the profit slump to weaker UK parcel revenue stemming from the wider macro environment.
They expect the company’s cash flow to be negative this year as a result of delayed real estate disposals.
The fact that GLS’s outlook is unchanged suggests a “deterioration” at Royal Mail, analysts at investment bank and stockbroker Liberum said on Thursday.
“The GLS outlook is unchanged implying a deterioration at Royal Mail,” Gerald Khoo, a stock market analyst at Liberum, said in a research note.
GLS has an international footprint that includes 40 countries and nation states, mainly in Europe, and in North America, according to the IDS website.
It specialises in business-to-business and business-to-consumer parcel delivery across borders.
Investor confidence in the delivery group as a whole “is likely to take another hit as the profitability horizon is pushed out further”, said Hargreaves' analyst Nathan.
“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,” he said in a research note on Thursday.
“Whilst the international division GLS is generating a healthy profit the growing economic pressures have kept a lid on margins here too.
“The fact that this side of the business should be able to support a dividend this financial year will be music to some investors ears, but given that Royal Mail is far off from making a contribution, it’s likely to be more of a symbolic gesture than a meaningful payout.”