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

The Royal Mail could lose its coveted FTSE 100 place in the next planned FTSE shake up, due on 30 August.


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. Some experts are predicting that it will not be so lucky in retaining its blue-chip status this time round.

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 rose about its speed of restructuring, falling letter volumes and ongoing negotiations with unions around closing its expensive Defined Benefit pension scheme. These concerns mean that shares have fallen to £3.97, and are down 24% YOY [1].

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. That makes Royal Mail’s spot in the FTSE100 distinctly vulnerable to the likes of the FTSE 250’s upwardly mobile NMC Health (NMC). NMC may not be a household name like Royal Mail, but it is the largest private healthcare provider in the United Arab Emirates and could replace Royal Mail, thanks to its market capitalisation of around £5.4bn and 101% YOY rise.

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. On July 7, the Financial Times’ Bryce Elder warned: ‘Royal Mail slipped into the FTSE 100 relegation zone on Friday amid fears that a hoped-for surge in parcel volumes cannot be delivered… The stock could be a candidate for expulsion from the blue-chips at the next FTSE index review, scheduled for August.’

Analysts became increasingly pessimistic after UBS added Royal Mail to its “sell” list on July 7. 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.

Investors are wrong to assume parcels revenue growth will continue to cancel out gradual declines for letters, said UBS: ‘‘In order to stabilise profits, we believe parcel revenue would have to grow by 5 per cent; something that appears highly unlikely in the current environment.’ However, UBS recommendation was partially offset when HSBC Holdings upgraded from a hold to a buy later in the month.

In the last round of quarterly relegations Royal Mail narrowly survived the cull, and Hikma Pharmaceuticals and Intu Properties were demoted. In their place came G4S, the security solutions group, returning to its top 100 place, together with Property company Segro.

Well-known names are certainly not immune to being ousted from the FTSE’s top 100, however. In this year’s first major shake up of the 100, back in March, Dixons Carphone was relegated down to the FTSE 250, together with outsourcing giant Capita. Dixon’s shares had lost nearly 20% of their value in the preceding six months. Royal Mail’s shares have taken a year to fall a similar amount.

However, as mentioned earlier, even back in May, just before the most recent FTSE 100 reshuffle, Royal Mail’s position was in doubt. Helal Miah, analyst at The Share Centre, said Royal Mail had become: “Heavily reliant on the international parcels business as letter volumes continue to act as a drag on overall performance… It rubber stamps the ethos that the uncertainty amongst UK businesses in the current Brexit environment means less are using direct mail marketing.”

This analysis caused Portfolio Advisor and Economic Voice to warn Royal Mail was in the FTSE 100 danger zone for relegation, while Forbes analyst Roger Aitken added on May 29: ‘’Despite recently posting full year results that pleased the markets where group revenue and profits before tax were up, Royal Mail also finds itself in the high-risk zone for relegation.’

Going in to the next FTSE 100 reshuffle Royal Mail is facing further new woes that could have experts even more concerned. Shareholders liked its original plans to change its expensive pension scheme, but the Communication Workers Union (CWU) rejected Royal Mail’s revised pension proposals in July. Royal Mail, one of the few big UK companies to still have a defined benefit plan, wants to replace it with the choice between a modified defined benefit or defined contribution pension scheme. It says this would cost about £400 million annually, compared with more than £1 billion for the original scheme. The CWU 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.

To cloud the issue further, Royal Mail Pension Plan chief executive Chris Hogg is to leave the defined benefit scheme. He is set to take over as chief executive of the £16.6bn (€18.2bn) National Grid UK Pension Scheme.

And, even more significantly for industry watchers, there are rumours that Royal Mail’s highly regarded Chief Executive, Moya Green, might also be departing. 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.

Perhaps the main reason Royal Mail is staring down the barrel of eviction from the FTSE 100 is that ParcelHero’s industry analysis suggests the parcel revenue growth of around 5% Royal Mail needs is achievable in today’s growing market; but Royal Mail is falling behind the growth of the industry as whole. Royal Mail’s core UK Parcels, International and Letters (UKPIL) division’s revenues were actually down 2% from £7.671bn to £7.658bn this year. Royal Mail’s UKPIL parcel volumes were up just 3%, in an e-commerce market growing at around 19.5%. Royal Mail is showing stable results; but in a burgeoning market thanks to the growth in e-commerce home delivery.

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.



[1] Figures correct as of 10.50am August 24, 2017.




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