Markets

Former state monopoly Royal Mail suffers stock market freefall as strikes loom

Key Points
  • Shares slumped 11% early in the trading session to hit a record low of 168.05 pence per share, almost half the 330 pence per share initial public offering (IPO) price in October 2013.
  • In May 2019, CEO Rico Back announced a £1.8 billion ($2.3 billion) investment in a five-year plan to overhaul the business and achieve sustainable profitability by 2024.
  • CWU (Communication Workers Union) is preparing another ballot of members for industrial action and the threat of more strikes on the horizon.
A Royal Mail Group postal worker on his delivery round in Manchester, U.K.
Paul Thomas | Bloomberg | Getty Images

Royal Mail shares sank to an all-time low on Thursday after the former British postal monopoly warned that its U.K. business could lose money next year as strikes bite.

Blighted by sliding letter volumes and union tensions, the company posted productivity gains of 1.5% for the full year on Thursday morning, below its 2% target, and cited delays to its transformation plan and economic uncertainty as increasing the likelihood of a loss in 2020-21.

Shares slumped 11% early in the trading session to hit a record low of 168.05 pence per share, almost half the 330 pence per share initial public offering (IPO) price in October 2013.

In its first day of conditional dealings on the London Stock Exchange, the stock soared 38% to 455p, but has serially underperformed since then. Over the last two years, shares of the 500-year-old company have plunged 63%.

In May 2019, CEO Rico Back announced a £1.8 billion ($2.3 billion) investment in a five-year plan to overhaul the business and achieve sustainable profitability by 2024.

Much like the investors, significant portions of its workforce are losing patience with Royal Mail. Union CWU (Communication Workers Union) is preparing another ballot of members for industrial action and the threat of more strikes on the horizon.

'Cherry on top of an unappetizing cake'

Royal Mail is not the only postal company suffering, with the likes of FedEx and UPS also posting disappointing trading updates of late as a combination of economic conditions, rising costs and strong competition, but the profit warning is the "cherry on top of a very unappetizing cake," according to Russ Mould, investment director at British brokerage AJ Bell.

"Royal Mail has to reshape its business for the future while also operating against a difficult backdrop. The renewed threat of strikes could make customers think twice about wanting to use its delivery services, particularly as there are plenty of alternative providers in the market," Mould said in a note Thursday.

He said the reinvention effort is likely to be drawn-out with no guarantees of a "leaner, meaner business" at the end of it, suggesting that shareholders will be fearful that their declining investments could fall even further.

"Ultimately, Royal Mail has become as frustrating a company for investors as queuing up for hours on a Saturday morning to retrieve a parcel from the sorting office," Mould added.

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With the letters market in "terminal" decline, Interactive Investor Head of Markets Richard Hunter suggested on Thursday that Royal Mail would need to rely on consolidation of its core parcel business, though even this is beholden to the threat of strikes.

Royal Mail's international business fared better, posting an 11.1% revenue increase at its GLD subsidiary on the back of success in Canada, Germany and Belgium, while overall group revenues increased by 3.7%.

One of the company's main appeals for investors down the years has been its dividend yield, projected at 7.7%.

However, Hunter suggested that there is a feeling of déjà vu towards the promises of transformational progress accompanying another "uninspiring" update.

"Royal Mail's hope must be that it can begin to display some material progress as opposed to strategically clutching at straws," he said.

"Investors may have been hoping for brighter news in this update, but it has failed to materialize once more. As such, there is unfortunately little reason to suspect that the market consensus of the shares as a sell is likely to improve for the foreseeable future."

As of Thursday afternoon, Royal Mail stock was down by around 7.9% on the trading day, sitting at 174.4p per share.