Royal Mail shares crash AGAIN, but are they now a bargain buy?

Shares in Royal Mail (LSE:RMG) fell heavily yet again this morning as the company released its latest set of full-year results to the market and news that it would be drastically reducing its workforce. 

Does today’s cost-cutting measure mean the shares are now a canny contrarian play? Here’s my take.

Were Royal Mail’s numbers that bad?

There certainly weren’t great. While revenue came in at £10.84bn over the 12 months to 29 March (up 3.8% from last year), adjusted operating profit was 13.6% lower (£325m). 

Broken down, it’s the UK Parcels, International and Letters division (UKPIL) that continues to be a drag. Revenue here grew 1.6% to £7.72bn but adjusted operating profit fell a worrying 41.2% to £117m.

The vast majority of the remaining revenue was achieved via the company’s Europe-focused subsidiary (GLS), where adjusted operating profit rose 17.5% to £208m.  

It doesn’t look like things will get better soon either. Over the first two months of the new financial year, year-on-year revenue is down £29m at UKPIL. Moreover, total costs are already up £80 due to overtime, staff absences and social distancing measures.

Clearly, the company needs to take action and that’s what it’s done.

Job cuts

Commenting on today’s numbers, interim Executive Chair Keith Williams reflected that the UK business had “not adapted quickly enough” to people sending a greater number of parcels and fewer letters. The pandemic “has accelerated those trends,” Mr Williams said, “presenting additional challenges”. 

As such, the company has announced that it’s looking to cut 2,000 management roles — roughly a fifth of its management total. It’s also reducing capital expenditure by around £300m over the next two years.

Bargain buy?

Of course, there comes a point when even the most hated stocks have the potential to make money for brave investors if they’re cheap enough. Based on the company’s own outlook, however, I’d continue to give Royal Mail a wide berth.

In spite of the plan announced today, the company stated that the coronavirus pandemic means its future is “challenging and volatile”. UKPIL is expected to be “materially loss-making in 2020” and profits at GLS “may potentially be reduced”.

Assuming coronavirus-related restrictions lift after June and UK GDP falls by ‘only’ 10%, year-on-year revenue is expected to fall by between £200m and £250m. Costs from the virus will reach £140m with a further £110m hit predicted from higher parcel volumes.

Should things turn out a lot worse than this (say, GDP declines by 15%), like-for-like revenue would likely fall by between £500m and £600m. Costs would be even higher.

Whichever scenario plays out, this is pretty tough reading for its owners, even if some of this is already reflected in the share price.

Don’t expect dividends

Aside from the above, would-be investors need to be aware that there will be no dividends paid in the new (current) financial year. Personally, the idea that these will return in FY22 strikes me as optimistic. 

It’s also worth mentioning that the company is the fifth most shorted stock as I type, according to shorttracker.co.uk. Put simply, this means a lot of market participants are betting that the shares will continue to fall in value.

All told, I think there are far better options right now than Royal Mail, particularly for income hunters. The road ahead will be long and hard. Don’t expect the shares to deliver any time soon.