Shares in parcels-to-letters delivery service Royal Mail (RMG) are enjoying their best run in two years, currently trading at 505.8p versus a 12-month low of 370.9p in November 2017. The market has given a positive reaction to a breakthrough deal on pay and pensions.

Alex Paterson, an analyst at investment bank Investec, reckons the shares could hit 600p over the next 12 months. He says the company should now be able to focus on product development and generating further operational efficiencies.

‘For delivery staff, roughly 90% of UKPIL employees, out of a working day of between 7 and 8 hours, only between 4 and 4.5 hours, or about 56%, is spent actually delivering mail and parcels, with the remaining time spent in the local delivery office where a number of functions take place,’ comments Paterson. UKPIL is Royal Mail’s
UK parcels and letters arm.

‘One of the most time-consuming functions is manually sorting and sequencing parcels and unaddressed mail and this can now be automated and hence the 56% of time spent delivering can increase.’

WHAT DID ROYAL MAIL PROMISE IN ORDER TO END THE DEADLOCK?

Royal Mail says it will close its defined benefit final salary pension scheme at the end of March but will maintain transitional pension agreements ahead of the eventual launch of a defined contribution scheme. The ongoing annual cash cost of pensions will remain at £400m per year.

In exchange for a 5% pay rise and shorter working week, employees will work with Royal Mail to increase operational efficiencies by using technology to efficiently process and deliver parcels.

The Communication Workers Union has endorsed the terms of the agreement and says the deal will now be recommended to the union’s 110,000 members in a ballot.

Alongside news of this agreement Royal Mail reported robust trading. It expects to deliver operating profit before transformational costs of at least £680m in its March 2018 financial year.

Paterson at Investec comments: ‘We believe that by unlocking the potential for productivity improvement, the outlook for Royal Mail has been transformed.

‘Royal Mail is the lowest margin and lowest rated mail stock in Europe, indicating that the market does not believe that margins can be maintained, never mind increase. We believe that margins can rise.’

Shares said last October to buy Royal Mail at 381p in the belief that its problems could be fixed – and we remain fans of the stock at the current price.

Even after the recent share price strength the company offers a generous prospective yield of 4.9%. (LMJ)

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