International Distribution Services (IDS) saw third quarter revenue rise 0.8% to £3.6bn. Within that, Royal Mail revenue rose 2.4% offset by a 2.0% drop at GLS driven by disposals. Underlying revenue growth at GLS was 2.5%.
Parcel volumes grew 2% at Royal Mail, while letters continued to decline in line with recent trends.
Royal Mail is on track to return to profit for the full year, on an underlying basis and excluding voluntary redundancy costs.
The takeover is progressing and is expected to become unconditional in the coming months.
The shares were broadly flat in early trading.
Our view
IDS, the owner of Royal Mail, is set to go private. After a series of negotiations, the £3.6bn offer (370p per share) was accepted last year and has since been approved by the government and regulators.
The potential suitor clearly sees something in the underperforming Royal Mail business, where there have been early signs of improvement. However, growth over the first 9 months has been flattered by election-related letter volumes and easy comparable periods last year when strikes hurt volumes. The underlying business is still under some pressure.
Parcel volumes are down from the booming demand seen over the pandemic, and letters have long been in a structural decline. As the UK's universal postal service, Royal Mail is obligated to deliver letters six days a week. But maintaining an infrastructure built for 20 billion letters when you're now only delivering 7 billion isn't a recipe for an efficient operation. IDS wants to be allowed to right-size infrastructure to reflect the modern-day reality, and conversations are underway with the regulator. But any reforms are likely to be a long time coming.
Royal Mail is also set to feel a hefty impact from changes to employer National Insurance announced as part of the Budget. With around 130,000 employees, it’ll feel a disproportionate hit compared to competitors.
For now, winning back customers lost during strike actions over the past year or so is a major focus. Royal Mail is on track to return to profit this year, albeit after stripping out a few items so take that with a pinch of salt. Profits at the group level are still being entirely propped up by the international business, GLS.
We're encouraged that GLS is still looking robust, and we believe this division has some long-term growth opportunities, but growing margins is proving to be a challenge. That may become easier if inflation subsides further. Potential bolt-on acquisitions to GLS are also on the table.
IDS looks to be on better footing than it has been for some time, with Royal Mail on a pathway back to profitability and GLS performing well in a tough market. But there’s no denying the challenges it faces in the UK, and in the near term, the valuation will be capped by the takeover price.
Environmental, social and governance (ESG) risk
General Industrial companies are medium risk in terms of ESG but can trend up to the higher end of the spectrum depending on subindustry. The primary risks can include labour relations, emissions (either product or production-based), business ethics and product governance. Other concerns are waste and health & safety.
IDS’s overall management of material ESG issues is strong.
IDS has board level oversight for ESG issues and very strong reporting. Executive pay is linked to sustainability performance targets and the environmental policy is also very strong. There is a strong whistleblower programme and health & safety management is adequate, though employees lack regular training. The elephant in the room is last year’s strike action at Royal Mail. While agreements with the unions relating to pay and working conditions have been made, there remains an ongoing risk.
IDS key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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