As Royal Mail reports this morning Helal Miah, investment research analyst at The Share Centre, explains what it means for investors…
This morning, Royal Mail produced a Q1 trading update with no real surprises as the group revenue was flat. The group’s UK division saw revenues decline by 2% as parcels growth of 2% was offset by the continuous decline in the letters business which saw revenues fall by 4%. The smaller European parcels business saw an 8% increase in revenue. Despite the failure of other parcel businesses recently, the competition levels in the industry remain very high. Therefore cost control will remain a key focus to drive profitability and the group are hoping to keep costs at least flat or better compared to the previous year.
With the withdrawal of Royal Mail’s only competitor, Whistl, delivering door to door letters there is the possibility of Ofcom stepping in with more price controls. However, investors are reminded that this should not be feared so much as the price regulated part of the business only represent 5% of group revenues.
We currently recommend Royal Mail as a ‘hold’, as growth in some parts of the business will offset decline in letter volumes over the years. However, shareholders should be happy to take away the attractive dividend yield.
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