Royal Mail Group is in better shape than it’s letting on

Royal Mail: not a great long-term business

When Royal Mail Group (RMG) published its annual results last week, shares fell by 10%. I’ve read plenty of analysis since then, but none of it really gets to the heart of the matter. What’s going on here?

Looking at Royal Mail’s results presentation, I noticed something funny straight off the bat. It was completely out of kilter with how most publicly-quoted companies present themselves.

It was a masterpiece in pessimism – an exercise in stripping out any silver linings and replacing them with gloomy clouds.

But I think that the company’s odd tactics are part of a carefully calculated plan. And I strongly suspect that these clouds will pass.

Why would Royal Mail highlight this?

When you read a company results statement, the first thing you normally see is what management considers its ‘highlights’ for the reporting period.

This is the stuff the company hopes a journalist will pick up on and present to the masses. That’s why there’s always more than a bit of positive spin on them.

But not so in Royal Mail’s case. In last week’s release, you could term the summary introduction as lowlights, not highlights.

The introductory message included: “We are facing a couple of headwinds. The competitive environment on the parcels side is more intense”ie parcels, the one area of the business that’s experiencing any growth, is getting hammered by competition.

And they go on to lament the position of the dwindling letters business: “without timely regulatory action, direct delivery could undermine the economics of the Universal Service and our ability to generate… margin”

In plain English, that means RMG may have to consider dropping its commitment to deliver everywhere in the UK at a uniform price.

It’s saying that it needs the regulator to step in and change the rules of engagement. Without help, it’s going to find it difficult to make a profit.

And what sort of profit is Royal Mail aiming for? It’s laid out in the first paragraph: “single digit revenue growth”.

Single digit revenue growth. Not exactly full of the joys of spring, are they?

No wonder investors got the jitters.

Here’s what they didn’t publish

There’s just one problem – that gloomy portrait of the business is not backed up by the facts.

First off, RMG has significant assets that can be sold to boost its balance sheet. There’s also plenty of fat to cut from the business.

Sure, restructuring will cost money, and there are the choppy seas of industrial relations to navigate. But as part of a turnaround play, these are exactly the sort of challenges that could bring about medium-term profits.

And the company is pretty well-placed (for the moment) to capitalise on the growth of internet shopping.

But did we hear about any of this in the highlights? No way.

Why don’t they tell the full story?

I put it to you that Royal Mail is trying to show a weak hand.

In the long term, Royal Mail’s business is in trouble. While it has to deliver to Britain’s awkward, remote destinations, its competitors are taking over in the key urban areas of London, Manchester and Liverpool.

Basically, competitors are nicking the lucrative trade and passing on all the unprofitable stuff to Royal Mail.

That’s given RMG a bloody nose – which is why it wants the regulator, Ofcom, to intervene.

Whether or not Ofcom will do that remains to be seen. But RMG knows that it must show a weak hand to have any chance of getting help.

And don’t forget that RMG is also locked in talks on restructuring its heavily unionised workforce. It would not look good at all if the company was painting a rosy picture for shareholders at the same time.

Think about it. Why would RMG highlight its plans for cutting costs and upping profits at the expense of workers now? Is this the right time to announce politically-sensitive plans to cash in on prime property assets?

No. And you can bet your bottom dollar that it doesn’t want to highlight to the press any commitment to increase the dividend for shareholders.

You’ve got to ask yourself, how would any positive news look right now?

What it means for investors

As I wrote before RMG floated, I don’t see it as a great long-term business. Mail is business in terminal decline, due in part to the rise of email and text messaging.

But I still think that there’s money to be made here in the medium term. It’s just that RMG can’t make a song and dance about it, for all the reasons I’ve just laid out.

So there’s no need to panic right now. The recent communication from RMG was engineered to disappoint – and it worked.

Politically speaking, it was a shrewd move – but don’t be fooled. In the near term at least, this is a healthier business than they’re letting on.

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