Royal Mail gets ‘frothier’ as profits almost double

In its first set of results as a listed company, the group revealed operating profits nearly doubled to £283m for the six months to 29 September from £144m a year earlier, although figures were boosted by £95m after a VAT credit and lower-than-expected costs of its overhaul programme.

Read more: Is privatisation the right move for Royal Mail - and for us?

The parcels business saw sales volumes growth grind to a halt as the summer heatwave slowed online purchases.

The Royal Mail also said the threat of strike action had since cost it business parcel customers in its key Christmas quarter.

Energy bill hikes

But the group said the recent launch of size-based pricing was off-setting the slowdown in demand and added the spate of energy bill hikes was benefiting its letter business in the second half as providers send out mailings to millions of customers.

Millions of Royal Mail staff and investors will share out a £133m dividend payout on their shares next July, although Royal Mail confirmed it would only pay a final dividend for this financial year.

Shares rose more than 4 per cent to 553p after the results, having soared since being valued at 330p in last month’s initial public offer, which saw 690,000 members of the public pick up tranches worth around £750.

Business Secretary Vince Cable initially dismissed the leap as “froth” but they have since held steady at well over 500p.

Cost-cutting

Royal Mail’s half-year figures showed underlying pre-tax profits leaping to £233m from £94m a year earlier, as revenues rose 2 per cent on a like-for-like basis.

Chief executive Moya Greene returned Royal Mail to profit last year after four years of successive losses, as the company prepared for privatisation.

It has been helped by widespread cost-cutting under its transformation programme, which has seen job losses and the closure of a number of mail centres. It has shut four sites since the end of last March and is planning another four by March next year.

Parcels business

Addressed letter mail fell 6 per cent in the first half of its year, although this was an improvement on the 9 per cent drop a year earlier.

Royal Mail said its parcels business now accounts for more than half – 51 per cent – of group revenue.

Its results are also being driven by a robust performance in its General Logistics Systems (GLS) arm, which operates across Europe and Ireland and delivered an 11 per cent hike in first-half earnings.

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said Royal Mail’s maiden results since privatisation have had a “warm reception, despite increasingly loud whispers of valuation concerns”.

A recent analysts’ note from broker UBS poured cold water on the strong run for Royal Mail’s shares, saying despite its good prospects the stock looked overpriced and targeted a much lower value of 450p.