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Is the Last Post sounding for Royal Mail’s FTSE100 membership?

28th Aug 17 4:58 pm

The Royal Mail could lose its coveted FTSE 100 place in the next planned FTSE shake up

Royal Mail Plc has been a member of the FTSE 100 since shortly after privatisation in 2013, but only narrowly escaped relegation in the most recent quarterly review in June. Now the e-commerce delivery specialist ParcelHero is warning that Royal Mail might not be so lucky in retaining its blue-chip status this time round.

ParcelHero’s Head of Consumer Research, David Jinks MILT, says: ‘Royal Mail was the darling of the Stock Exchange following full privatisation in 2013, but after shares reached the giddy heights of £6.15 in January 2014 concerns have grown about its speed of restructuring, falling letter volumes and ongoing negotiations with unions around closing its expensive Defined Benefit pension scheme. These worries mean that shares have fallen to £3.97, and are down 24 per cent YoY.’

Jinks said: “Royal Mail’s market capitalisation is now £3.97bn, and, since its flirtation with relegation in June, its shares have dipped below the talismanic £4.00 figure for the first time. While there is more to the calculation of who is relegated than simple market capitalisation, it’s significant that of all the FTSE 100 companies, only embattled Provident Financial – forced to issue a fresh profits warning this month – has a lower market cap, £1.18bn.”

Following Royal Mail’s relegation escape in June, its eventual demotion to the FTSE 250 has continued to be predicted by industry experts in the Financial Times and elsewhere. And David says that analysts became increasingly pessimistic after UBS added Royal Mail to its “sell” list on 7 July.

‘The broker claimed there is a lack of automation and slow progress with restructuring, making Royal Mail relatively expensive for heavy parcels. UBS said this is likely to erode Royal Mail’s share of a deteriorating UK ecommerce market and because costs are largely fixed, any revenue shortfall is likely to hit profits.’ (UBS recommendation was partially offset when HSBC Holdings upgraded from a hold to a buy later in the month.)

Shortly before the last FTSE 100 culling in June, experts from Forbes, Portfolio Advisor and Economic Voice warned Royal Mail was in the danger zone for relegation, and David warns that going in to the next FTSE reshuffle Royal Mail is facing new woes that could have analysts even more concerned.

Jinks said: “Shareholders liked its original plans to change its expensive pension scheme, but the Communication Workers Union (CWU) recently rejected Royal Mail’s revised pension proposals. The CWU now says it will give the privatised postal operator until September 6 to reach a settlement; that is, of course, beyond the key date of Wednesday 30th when the FTSE 100 winners and losers are chosen.”

And, even more significantly for industry watchers, there are rumours that Royal Mail’s highly regarded Chief Executive, Moya Green, might be facing other diversions. Says David: ‘Moya was recently appointed to the board of EasyJet, a controversial move because of the timing over the pensions row. It’s not only the potential distraction that alarms investors; at least one industry expert has suggested that, as a former Canadian transport minister with experience in dealing with unruly unions, Moya could in fact become the next CEO of EasyJet before long!

David continues: ‘Perhaps the main reason Royal Mail is staring down the barrel of eviction from the FTSE 100 is that our industry analysis suggests Royal Mail is falling behind the growth of the parcels industry as whole. Royal Mail’s core UK Parcels, International and Letters (UKPIL) division’s revenues were actually down two per cent last year. Royal Mail’s UKPIL parcel volumes were up just three per cent, in an e-commerce market growing at around 19.5 per cent. Royal Mail is showing stable results; but in a burgeoning market thanks to the growth in e-commerce home delivery.’

Concludes David ‘Royal Mail is over 350 years old, so it has withstood many challenges in its long history; in time its plans to modernise its equipment and practices will doubtless come good. But probably not in time for the Wednesday’s FTSE 100 verdict.’

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