Short-Sellers Are Winning Their Bet Against the Royal Mail

(Bloomberg Opinion) -- One big argument against Jeremy Corbyn’s plan to re-nationalize large chunks of the British economy was that it would prove eye-wateringly expensive. Yet one of the companies in the sights of the opposition Labour Party’s leader, Royal Mail Plc, is turning out to be anything but.

The postal operator’s heavily shorted shares plunged 9% on Thursday to a fresh low after its management warned of deteriorating letter volumes and risks to the business from threatened strike action. During the Royal Mail’s initial public offering in 2013, the British government — which owned it at the time — was criticized for short-changing the public with a cheap offer price and gifting future profits to shareholders. But it seems it was taxpayers who got the bargain. The stock has almost halved since the IPO, valuing the company at just 1.7 billion pounds ($2.2 billion).

In view of bleak cash flow expectations and large fixed costs — the company has 140,000 U.K. employees — there’s a danger that an already reduced dividend may need paring back again. Instead of clamoring for nationalization, now much less likely after Boris Johnson’s Tories won the recent election, the British public should be glad that Royal Mail is investors’ problem, not theirs.

With urban streets clogged by e-commerce delivery vans these days, you’d think Royal Mail would be raking it in. The company’s European and U.S. parcel business, GLS, is doing well, but the U.K. is a different story. Having been starved of investment under state ownership and with a network designed for delivering letters, Royal Mail is poorly positioned to take advantage of the internet shopping boom. About one-quarter of parcels being delivered by Royal Mail are sorted automatically, compared to about 90% at its peers, Berenberg analysts note.

Confidence that a new chief executive officer, Rico Back, can soothe workforce tensions and boost parcel revenues via investments in technology is evaporating. In 2018 employees won pay increases and a shorter working week in return for productivity improvements but the benefits haven’t fully materialized.

The company won a court injunction to stop industrial action over the busy December period, but that will have further antagonized the workforce. Back, whose 5.8 million-pound “golden hello” contributed to a shareholder revolt when he took over, is already facing doubts over a new strategy unveiled in May.

Letter volumes are projected to be worse than anticipated in the next fiscal year; email is more convenient and costs nothing. And efforts to introduce technology and restructure the business are behind schedule. Labor unrest has put off customers, making it increasingly likely that the British postal operations will make a loss in fiscal 2021. The following year is looking difficult too.

Royal Mail is stuck. It can’t easily hike letter prices because doing so might accelerate the decline in volumes. Competition in parcels is brutal because gig-economy rivals don’t have the same fixed costs and worker protections, plus they can cherry pick profitable areas. Neither can the government let the company wriggle out of its expensive obligation to deliver the mail to some 30 million addresses six days a week. Johnson was elected on a promise of boosting the regions beyond London.

Royal Mail would be harming itself if it reduced technology investments, which is why a dividend that costs 150 million pounds annually is vulnerable. At current prices, the shares yield almost 9%. Investors clearly believe a further cut to the payout is possible (it has already been reduced by 40%).

Short-sellers including Blackrock Investment Management UK Ltd., Bodenholm Capital AB and JPMorgan Asset Management UK won’t worry about that. Royal Mail’s long-suffering shareholders are running out of reasons to keep the faith. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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