International Distribution Services (IDS) has announced that Royal Mail CEO, Simon Thompson, has informed the Board he intends to step down. This news comes shortly after IDS confirmed it had come to an agreement with the Communication Workers Union (CWU) over worker pay at Royal Mail.
The Board is in advanced stages of appointing a new CEO and Simon Thompson has agreed to remain with the business until 31 October 2023 as part of the transition.
The agreement with CWU still requires agreement by its members but represents a 3-year deal including a total pay increase of 10% and a lump sum of £500 per CWU grade employee in Royal Mail and Parcelforce. There were several other initiatives in the agreement, like Sunday working for new employees and seasonal working patterns.
The shares closed down 1.5% following the news of Mr Thompson's departure.
View the latest International Distribution Services share price and how to deal
Our view
International Distribution Services (IDS) is the parent company for Royal Mail, and the international parcel business, GLS.
News that Royal Mail CEO, Simon Thompson, is stepping down isn't completely out of the blue. The past 18 months have been especially challenging as battles with the Union over workers' pay have wreaked havoc on operations.
Now a deal looks to have been sorted, a path forward can begin but it won't be easy for whoever steps in to the hotseat.
At the half year mark IDS had net current assets of just £76m, a key metric of short-term financial health. Even if performance holds up at GLS, the Group's International Parcel Network, it seems likely that IDS will be below cash-flow break even for the current financial year.
IDS' base case projection for the next year suggests it will have sufficient liquidity, although it expects to only have a small amount of breathing room on its loan covenants. These are requirements, set by lenders, around the amount of cash profit generated relative to things like net debt. We should get a further update on this with full-year results released later this week.
It's not surprising then, to see the board suspend the interim dividend. The prospective yield of 5.4% is, in our view, unlikely to materialise. Further time will tell.
Aside from union troubles, the underlying business is also under some pressure. Parcel volumes are down from the booming demand seen over the pandemic and letters have long been in a structural decline. A new 5-point plan was shared with investors at the half year mark, with headcount reduction a focus. There's been some progress already, with half of the planned reduction on track to be delivered by March. We'll find out in the upcoming results whether that was achieved.
There are some bright spots. We're encouraged that GLS is still growing revenue, and we believe there are some long-term growth opportunities in this division. Keep in mind that broader conditions might create some near-term challenges.
There's also been talk of GLS and Royal Mail splitting, but this is by no means guaranteed. If Royal Mail can return to sustained profitability, it may make sense to keep them together. If it can't, there are real questions as to what an exit might look like.
The agreement with CWU is a step in the right direction. Next up is finding a new CEO at Royal Mail, and returning the business to profitability whilst maintaining progress at GLS. If that sounds like a lot, that's because it is. There are substantial hurdles to overcome and investors should proceed with caution.
IDS key facts
All ratios are sourced from Refinitiv. 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.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.