Why it's hard to be positive about Royal Mail

In stark contrast to its nine-month trading update, investors welcomed Royal Mail's full-year results as the UK's original mail delivery service made 3% more adjusted operating profit than expected.

Royal Mail shares shot up almost 5% to 450p Thursday before traders decided to follow the wider market trend and take some money off the table.

After transformation costs, operating profit for the year ended 26 March came in a £575 million, up 2%. Adjusted pre-tax profit grew by 4% to £559 million.

Parcel revenue and volumes were both up 3%, with total letter revenue down a predictable 5%. Overall, UK Parcels, International & Letters (UKPIL) revenue was down 2%. In contrast, RMG's general logistics systems (GLS) business performed well, with volumes and underlying revenue up 9%.

As mentioned back in January, letter volumes excluding political election post, slumped by 6%, hurt by overall business uncertainty in the UK, the company said. Next month's general election is likely to give a short-term boost, though.

Chief executive Moya Greene continues to outline the firm's cost-cutting priority, saying it's on track to strip out around £600 million of annualised costs in UKPIL by 2017-18. "We are past the peak of investment; we now expect net cash investment of around £450 million in 2017-18," she added.

 And a 4% increase in the full-year dividend was also welcomed by investors. "Through a combination of our strategic approach to costs and more efficient investment spend, we will support our progressive dividend policy with the in-year trading cash generation of the group," said Greene.

The good news for shareholders is that RMG has finally managed to arrest the slump that had threatened to drive the share price down to two-year lows.

Those who bought in at RMG's highly oversubscribed IPO in 2013 at 330p are still in the money, and there's strong support at around 400p. However, analysts find it "difficult to be positive" on the stock.

According to broker Deutsche Bank's estimates, Royal Mail trades on a price/earnings (PE) ratio of 11.3 times and has a dividend yield of 5.5%.

But analyst Andy Chu rates the shares no more than a 'hold' with a price target of 450p. Chu prefers German rival Deutsche Post, which generates faster mid-single-digit organic growth and yields 3.7% on full-year 2018 estimates.

There are certainly clear risks in both the short and longer terms, with the inexorable trend of declining letter writing, competition in parcel delivery and the threat of a strike over RMG plans to shut the "unaffordable" defined benefit pension plan next year.

However unlikely it is that Labour will win the general election on 8 June, the threat of nationalisation remains.

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