International Distributions Services plc [LSE: IDS] (formerly Royal Mail plc) are a stock i’m choosing to stay away from. Here’s why.
IDS are made up of two main businesses. The first is GLS. An international parcel and fright provider operating across Europe and the US. The second is Royal Mail, the letter and parcel handling business here in the UK which incorporates Post Office & Parcelforce also.
GLS are actually a wonderful little business. Since 2013 their revenue has climbed from £1.5bn to £4.2bn in 2022. A straight-line growth rate of 180% over 9 years. GLS are expanding as well, moving into emerging markets such as Croatia, Czech Republic, Hungary, Poland, Romania and Slovakia. The business already has strong growth being seen in Germany, France, Spain and seems to be rapidly expanding into USA and Canada.
They are actively acquiring businesses in these regions as well recently buying Rosenau Transport in Canada.
However, whilst GLS are currently benefitting from the worldwide rise in online shopping and therefore increased parcel deliveries, Royal Mail is not performing anywhere near as well.
The Death of Letters
Royal Mail are a stagnant letter delivery business struggling to transform into a parcel delivery business.
The number of addressed letters being sent by UK residents is plummeting to all time lows. In 2013, Royal Mail reported handling 63m letters a day. By 2017, this had fallen to just 15m a day. By 2023 this is expected to have fallen to 7m a day.
The UK public are simply not sending traditional letters any longer.
Royal Mail have known about this decline for a long time of course. Their 2013 annual report specifically calls out the need for the business to transition from being a “letters company that also handle parcels” to being a “parcels company that also handle letters”.
However, 9 years on and the board at IDS have recently admitted they are “not as well placed as they would like to be”. The company do not have the infrastructure in place to be a dedicated parcel handling business. Indeed, the transition across to this new focus has so far cost Royal Mail £1 billion in reinvestment and restructuring costs. All eating into the profits being achieved by IDS.
The trends look poor
In 2014, Royal Mail had 148,000 employees, by 2022 this has fallen to 137,000 employees.
Recent news articles suggest this number will fall a further 10,000 in 2023.
And whilst Royal Mail has enjoyed parcel revenue growth of 54% over the last 9 years, they’ve seen letter revenue fall from £3.5bn to £2.5bn. A 29% revenue decline over the same period.
IDS also warned in their 2020 annual report that they expected Royal Mail to become “materially loss making” in 2021. Whilst that didn’t happen due to an abnormal spike in parcel volumes that year, there are now more problems for Royal Mail around the corner in the form of their pay disputes.
The company has been negotiations with their staff workers union since 2019 regarding an increase to staff pay. In early 2022, the board offered the union a 2% pay increase plus a further 2% salary bonus. This was refused.
Both parties went back to the negotiation tables again in October 2022 where the board offered a 9% pay increase over a 2 year period for staff. This was again refused.
Finally, in November 2022 the board made a “final offer” of 9% over 18 months. This was refused on November 23rd and followed by a union decision to strike several days across November and largely December. This included 9th, 11th, 14th, 15th, 23rd and 24th December.
The board are now warning that these strikes have cost the business £350m in revenue so far, and look likely to reach £450m by the end of the year if the strikes go ahead, resulting in the inevitable slashing of 10,000 jobs to help protect the business. Christmas is a significant period of time for parcel deliveries and this strike is set to hurt the business in the most significant way.
Ofcom have also recently completed a report on Royal Mail, finding that the business was performing “well below expectations”. The report confirms that only 82% of all mail sent 1st Class was reaching its destination within a day. Royal Mail also reported a rise in customer delivery complaints.
A potential Split
There is also now talk of a potential split of the two businesses GLS and Royal Mail.
If this were to go ahead, I personally would be very interested in carrying out some deeper analysis on GLS as a single entity. I love the growth and they represent the successful aspect of IDS that has provided them with the groups revenue growth seen over the last decade.
Royal Mail, however, are the weak link. Their transformational costs are high. Expenses run at 95% of all gross profit, and over the last decade they have consistently achieved less than 4% earnings per year. Leaving little to re-invest into further growth.
It remains to be seen if Royal Mail can transition successfully to a parcel business amid the decline in letters and still remain a profitable business.
However, i’m not the kind of investor who would be prepared to wait around and see.
In my opinion there are better options out there for my investment capital and i’m not prepared to take the risks that Royal Mail bring with it.
The shares are incredibly cheap right now, however. At £2.50 per share at time of publishing you’re getting £0.61 earnings per share and £5.58 in net asset value per share. Suggesting that £2.50 is a huge bargain.
However, there’s a reason the shares are underpriced. They are loaded with the risk of Royal Mail, struggling to transition across to a parcel handling business, a culling of staff numbers, employee strikes and incredibly high expenses relative to gross profit.
With the Ofcom concerns and the rise in customer complaints, the trends are all pointing in the wrong direction for me.
The share price might attract gamblers who fancy a little punt on the cheap, but that’s not my investment strategy.
Big fan of the GLS aspect, but all the time Royal Mail represent 60% of the total business, i’m not interested and will look at better options for my capital.