International Distribution Services' (IDS) half year total revenue fell 3.9% to £5.8bn. That was driven by a 10.5% drop in Royal Mail revenue, which was only partially offset by a 9.5% rise from GLS.
The group made an underlying operating loss of £57m, compared to profit of £404m last year. Weak parcel volumes and the impact of strikes meant Royal Mail recorded a loss of £219m. GLS battled higher costs, but was able to generate profit of £162m when converted to sterling.
At Royal Mail, talks with the Union over pay are ongoing. An improved pay deal worth 9% over two years has been delivered to the Union. Royal Mail has said ''Further strike action will necessitate more restructuring and job losses and make our new offer unaffordable''.
There was a free cash outflow of £143m, compared to an inflow of £261m last year. Net debt, including lease liabilities, rose from £540m to £1.5bn.
IDS expects to see a full year underlying operating loss for Royal Mail of £350-£450m. GLS is expected to deliver profit of EUR370-EUR410m.
The board has decided not to pay an interim dividend.
The shares fell 1.0% following the announcement.
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Our View
International Distributions Services (IDS) continues to battle with Industrial action at Royal Mail, which has severely impacted the Group's ability to resize its operations in the face of falling volumes. This then becomes a vicious circle, with volumes taking another lurch downwards while strikes happen, and the prospects for Royal Mail worsening further.
Until a way forward is found, the outlook appears precarious. 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.
It's not surprising then, to see the board suspend the interim dividend. The prospective yield of 6.9% is, in our view, unlikely to materialise unless there's significant progress with unions and cost cutting exercises.
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, with job cuts a key focus as the group aims to shed 5,000-6,000 jobs over the next year and get a tighter grip on costs.
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.
It's always possible that new rounds of talk with the Union could result in an end to strike action that allows Royal Mail to get on with returning the business to profitability. If this happens, the company's valuation could re-rate substantially. There are, however, substantial hurdles to overcome and investors should proceed with caution.
Royal Mail 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.
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