Royal Mail owner returns to statutory profit – but legacy issues loom large

The release of full-year figures for International Distribution Services (IDS) was delayed after auditor KPMG requested more time to complete its assessment. Ultimately, the results highlighted the stark contrast between the Royal Mail business and the Netherlands-based parcel service GLS. The latter delivered an adjusted operating profit of £320mn, while Royal Mail recorded an adjusted loss of £348mn. When combined, the group's adjusted loss fell to £28mn against negative £71mn in the prior year. On a statutory basis, the group reported a modest profit of £26mn. Trading cash displayed outflows on a similar scale over both years, while net debt crept up through the period.

There were some bright points as the year progressed. Royal Mail benefited from strengthening revenues from letter deliveries in the second half, leaving it close to breakeven level in the period (excluding voluntary redundancy charges). The group continues to expand network capacity, while investing in automation to boost efficiencies. But much depends on whether Ofcom decides to reform the universal service obligation, a structural drag on profitability unique to Royal Mail in the marketplace.

Czech billionaire Daniel Křetínský’s EP Group has now made a firm offer of 370p a share for IDS, valuing the group at £3.57bn. We envisage the approach will be subject to intense regulatory scrutiny with various undertakings and contractual commitments to the UK government yet to be agreed. The fact it is an election year will add to the drama. Křetínský is doubtless aware that IDS posted hefty losses in the prior year due to prolonged strike action and operational difficulties, but he might believe that the growth potential of GLS outweighs the challenge posed by the legacy business, particularly if Ofcom decides to play ball. Accept 

NB: This article was amended to take account of the EP Group bid.

Last IC View: Sell, 320p, 23 May 2024