Royal Mail At 20 Month High Ahead of H1 Results

Fiona Cincotta
By :  ,  Senior Market Analyst
Royal Mail are due to release H1 results through to September 27 on Thursday as the share price rallies to levels last seen in March 2019.

What to expect
The broad expectations is for Royal Mail to reveal plummeting profits as the impact of covid 19, increased competition for other parcel operators and declining letter volumes is felt.
Operating profits are expected to decline to £9 million, down from £165 million a year earlier. However, revenue is expected to increase 8.3% to £5.5 billion year on year.

Letters vs Parcels
Declining letter volumes has been a key theme for Royal Mail for many years now. However, what is becoming more interesting is how well parcel deliveries are doing and are expected to do over the coming years. In its most recent update Royal Mail revealed that it saw a 34% increase in parcel deliveries over the 5 months to August as the shift to digital and ecommerce boom means that there are simply many more packages to deliver offering a boost to Royal Mail’s top line.
However, the firm has consistently failed to restructure in a way that can cope with a move away from its legacy letters towards profitable parcels. This is a move which would involve heavy investment and higher logistics costs.
Royal Mail face a growing need to invest more on automation after a lack of investment in this key area has left Royal Mail playing catch up with competition.

Costs, Covid & Cost Cutting
Costs will also be in focus. Whilst collecting Covid tests has been beneficial for Royal Mail, additional covid costs to keep workers safe will have eaten into profits. Even so cost cutting remains a priority. The firm is still aiming for £130 million cost savings in 2021 -22
Any news on negotiations with unions will also be eyed closely. Now that CEO Rico Back has left there is hope that the new management will re-engage with the workforce and help push through further efficiencies.

Analysts’ recommendations
Of the 12 analysts watching the stock in the Financial Times, analysts were equally split with their recommendations:
4 rate buy
4 rate sell
4 rate neutral
This indecisiveness surrounding the stock is doing it few favours. Management need to show a strong strategic direction and hit targets on the cost cutting programme before we can expect too many changes here.

Chart thoughts
Royal Mail has put in a solid recovery from its mid-March low, surging to an 18-month high of 283p in the previous session. Royal Mail trades comfortably above its 50, 100 & 200 sma on the daily chart suggesting that there could be more buying on the cards. Resistance can be seen at 295p prior to 310p from Feb 2019.

The 50 sma offered solid support during the October pullback. Should Royal Mail’s results disappoint on Thursday, the 50 sma, today at 245, could offer support. However, a break-through this level could open the door to horizontal support at 220p. A break through here would be needed to negate the current bullish trend.

Related tags: Equities

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