Royal Mail shares in biggest one day drop on battle with Amazon

Royal Mail Group says fierce competition from Amazon is putting a serious dent into its UK parcels business.

As it reported first-half results that are in line with negative expectations, the incumbent British postal service that was privatised by the UK government in October 2013 said it now only expected UK parcel delivery operations to grow at half the rate previously forecast.

Noting a 1% fall in parcel revenue to £1.461bn, Royal Mail estimated pricing pressure from “Amazon’s own delivery network will reduce the annual rate of growth in the UK…to 1-2% for approximately two years.”

Group revenue grew 2% to £4.53bn.

UK parcel volume grew 2% and UK letter revenue is up 1% as letter volume fell 3%–slightly better than expected.

Operating profit before ‘transformation costs’ for the six months to 28th September fell 21.5% to £279m, with higher pension costs and the fact that a VAT refund which had inflated first-half results from the same period last year was absent this time.

Still, the operating result was at the top end of the range analysts had forecast: £237m-£279m.

Other mild positives include that RMG announced its first interim dividend.

Amazon leads charge of online rivals

However the predominant take-away from Royal Mail’s half-year should be that with parcels making up half of its turnover, its underperformance in the fast-growing online shopping market is a key investment focus.

Especially with letter volumes in a decline that’s very likely to be permanent.

The firm has acknowledged the primary threat from Amazon’s own delivery network and, in effect, Royal Mail has spotlighted a similar threat from all delivery networks of major firms in an e-commerce sector that is rapidly establishing itself.

This will be an important watch point for Royal Mail investors going forward.

RMG’s operating margin has expanded by 20 basis points to 6.2% on a half-yearly basis, but the full-year operating margin is forecast to contract to 4.9% in 2015 and is seen at 5.3% in 2016.

Investors seem to realise the challenge that potential margin pressure represents to Royal Mail’s viability going forward and the stock is currently posting its biggest one-day decline since it was listed.

Sell-off looks entrenched

The shares have lost as much as 11% from last night’s close at 477p to a low so far of 424p.

The half-hourly chart shows no inclination of a let-up just yet, although as I write this the selling does look stretched.

The daily picture shows the price is coming up to a likely deflection point more or less on 420p.

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