International Distribution Services (IDS) posted an 8.2% rise in revenue over the first quarter, to £3.3bn. Revenue was driven by both of IDS’s businesses, Royal Mail and GLS.
Royal Mail's revenue grew by 11.2%, benefitting from election-related mail. Addressed letters, which strip out most of the election mail, saw volumes drop 4%. Parcel volumes rose 11%. Growth was also flattered by the fact last year’s comparable periods were impacted by strike actions. Royal Mail's underlying operating profit is expected to turn positive in 2024-25.
GLS grew both revenue and volumes, up 4.8% and 5.0% respectively. There was revenue growth in almost all markets, with a turnaround in the US making progress.
Regarding the ongoing takeover offer, Bidco, the prospective buyer of IDS, has only received 3.37% in valid acceptances. This takes the current acceptance level to 30.93% when including the shares held by Bidco and its associates. Bidco needs at least 50% to be able to proceed, the IDS board is recommending shareholders accept the offer.
The shares were 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 has been put to shareholder vote. But a low turnout so far means the IDS board has reiterated its recommendation that shareholders accept the vote alongside its first quarter trading update.
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 quarter was 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 20bn letters when you're now only delivering 7bn 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.
For now, winning back customers lost during strike actions over the past year or so is a major focus. Returning Royal Mail to profitability will rely on continued top-line growth. Until that happens, hopes of breakeven profit for IDS at the group level is entirely propped up by the international business, GLS.
We're encouraged that GLS is still growing revenue, 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.
As part of the deal, the board proposed a special dividend of 8p per share. This is subject to completion and as ever, nothing is guaranteed.
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. But there’s no denying the challenges it faces in the UK, and in the near term the valuation will be driven by how the takeover progresses. Regulatory approval could be a tough hurdle, given how important Royal Mail is to the UK economy.
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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