Royal Mail shares fall following competition warning

Royal Mail, which floated on the stock market in October, has seen its shares fall 6.5% to 537p after it warned that “intense” competition from rivals could impact on future revenue in its first annual report.

Despite the warning, the company reported operating profits before ‘transformation costs’ of £671m, up from £598m last year, driven by a 2% increase in revenues, which reached £9.5 billion.

Moya Greene, chief executive officer of Royal Mail, said, “Our performance is in line with our expectations. We delivered 2% revenue growth, controlled operating costs and drove strong free cash flow.

“We are facing a couple of headwinds. The competitive environment on the parcel side is more intense. We are taking steps to remain the leader in this growing market. On the letters side, the headwind is direct delivery and we have strategies in place to counter its adverse financial impact.”

The report states that without “timely intervention from the regulator” direct delivery competition will have a serious impact on the company’s sustainability. Ofcom has previously stated that a margin range of between 5 and 10% is “appropriate and consistent” with the need for Royal Mail to earn a reasonable commercial rate of return.

However, the report states, “There is a reasonable prospect that this level of margin may never sustainably be achieved.”

Rival TNT Post is planning to rollout a direct mail delivery service, which Royal Mail says will have a negative impact on it. It added that TNT can “cherry-pick easy-to-serve urban areas” whilst Royal mail is required to deliver any items TNT does not consider economic to deliver itself. If TNT’s plans go ahead this could reduce Royal Mail’s revenue by over £200m in 2017/18, it explained.

An Ofcom spokesperson responded, “We not believe that there is presently a threat to the financial sustainability of the universal postal service. Ofcom keeps the market under constant close review, examining the future business plans of major operators.

“We have a duty to secure the universal service, and if we identify any future threat we have powers to step in and protect it. We would expect Royal Mail to take appropriate steps to respond to the challenge posed by competition, including improving efficiency.”

The controversial privatisation of Royal Mail in October last year was criticised for being undervalued at £3.3 billion. Shadow business secretary Chuka Umunna said the business has been undervalued by as much as £1 billion, leading to speculation that investors could enjoy instant profits.

As a result, the shares were oversubscribed, institutional investors placed more than £30 billion worth of orders, despite only around £2 billion being on offer. Investment banks Goldman Sachs and UBS, the two lead banks that advised the government on the sale, faced questioning by MPs over the valuation.

Photo: Royal Mail

Further reading:

Corporate responsibility ‘integral’ to Royal Mail success

Bankers face MP questioning over Royal Mail valuation

Investors in last minute rush to buy Royal Mail shares

Royal Mail investors at risk of losing out after ‘undervaluation’

Government to privatise Royal Mail in weeks