Royal Mail set for Ftse-100 after tapping Covid parcels delivery boom

Shares hit three-year high after agreement in principle with unions following years of labour negotiations, which hindered the company’s efforts to boost productivity

Royal Mail’s UK-focused unit delivered 1.7bn parcels in the 12 months ended March, up 32% year-on-year.

Royal Mail is set for a return to London's Ftse-100 Index as the 500-year-old company cements its position as a crucial component of Europe’s pandemic-driven e-commerce boom.

Following a three-fold price rally over the past 12 months, the stock is expected to replace engineer Renishaw in the benchmark during the next quarterly review, according to calculations by Charles Hancock, an equities trader at London broker Liberum Capital.

Surge in parcel delivery

Royal Mail lost its blue-chip status in December 2018, but the Covid-19 outbreak has had a dual impact on its fortunes: It spurred a surge in parcel delivery demand from locked-down consumers, while paving the way for an agreement in principle with the Communication Workers Union, whose bargaining power was diminished by forecasts of a spike in unemployment. 

Years of labour negotiations had hindered the company’s efforts to boost productivity, weighing on the shares. The shares hit a three-year high, rising as much as 5%. 

New entrants to indexes benefit as so-called tracker funds boost their weightings, while demoted stocks are vulnerable to selling by funds whose aim is to mirror the performance of a gauge. 

Royal Mail’s UK-focused unit delivered 1.7bn parcels in the 12 months ended March, up 32% year-on-year, while the Amsterdam-based General Logistics Solutions division reported volume of 838m, up 26%, the company said in its May 20 results statement. 

Amid a continued decline in letter volumes, parcels represented more than 70% of group revenue.

'Much improved' union situation

JPMorgan Chase analyst Samuel J Bland lifted his price target to 801 pence a share, the highest among analysts surveyed and suggesting a further 48% upside. Alongside the parcel boost, Mr Bland cited the “much improved” union situation, noting the company confirmed material cost savings in its results.

Peel Hunt analyst Alex Paterson upgraded his rating to buy from hold, citing the cost savings boost and a better revenue mix between parcels and letters. 

“A cultural change is also under way, which appears to be reducing bureaucracy and supporting a more harmonious relationship with staff,” he said. 

Royal Mail said at its results that it is working with the union on issues including parcel automation infrastructure and Sunday deliveries.

Still, while none of the 15 analysts recommends selling the shares, there are signs the pandemic parcel boom is easing, with volume slipping 2% in April as in-store nonessential shopping was allowed to resume in England.

• Bloomberg