So the end of the universal service, the abolition of which is seen as the silver bullet to save the Royal Mail, could be nigh. Or not, if the prime minister sees an electoral liability and another impending postal scandal like the ITV drama showing the state’s disgraceful treatment of subpostmasters.
Weekend reports had indicated that Ofcom, in its role as postal regulator, is shifting toward recommending the universal service obligation (USO) be ditched. The USO is the promise that Royal Mail will deliver six days a week on a promise of one-price-goes-anywhere.
It is the millstone that was hung around the neck of Royal Mail by the Cameron-Clegg coalition as the quid pro quo for going through its controversial sell-off in 2013: the promise that despite handing over the keys of this national asset to the private sector, the service would not decline.
A little over a decade on and Royal Mail, whose stock market listed parent is now called International Distributions Services (IDS), has apparently successfully persuaded Ofcom to advise government that perhaps the USO should be cut back to five days, ie no Saturday deliveries.
However comments from Rishi Sunak’s official spokesman that he won’t countenance such a thing indicates that a scaling back of the USO will not happen.
For most of the great British public, the existence of the USO is a mystery. Since when did they get letters six days a week anyway? And what about those random deliveries we sometimes get on a Sunday?
Royal Mail’s argument has been straight: the USO was the buttress of a 20 billion a year letter market. Replaced by digital communications, the letter market has fallen to 7 billion. And Britain is behind the curve, says the company: almost every other major democracy has reformed or watered down its USO.
Of course the real reason Royal Mail is so interested is the up-to-£250 million of annual operating savings the end of the USO will deliver.
How? Ask the trade unions and they will say the answer is obvious: tens of thousands more job losses from the 128,000 workforce which has already been hacked back by 20,000 since before the pandemic.
And where would the abolition of the USO end? Do those residing at or sending toward the far ends of the kingdom start getting charged more for mail?
So if the USO is not to be reformed or at least any time soon, that leaves the potential investor with the fundamentals of the IDS/Royal Mail proposition.
IDS is a two headed monster: a lossmaking Royal Mail with the structural drag of the USO and a disappearing letters market, plus a profitable overseas arm called GLS.
All the profits of GLS this year will be wiped out by Royal Mail’s losses so at group level IDS is eyeing only breakeven.
The City believes Royal Mail will, despite “execution risks”, return to profitability in the next financial year and beyond because it has pivoted to become a parcels delivery business.
It is regaining market share after all the strikes prompted by hopelessly ham-fisted management which as in so many other sectors had forgotten that the workforce had not only kept the business going during Covid-19 but in Royal Mail’s case had delivered record profits. IDS, as it happens, has another new chief executive, another German, Martin Seidenberg, 51.
However if it isn’t the first rule of investing, it should be: do not put your money in a highly unionised company. In this case the Communication Workers Union is well-organised and rarely loses a fight. And would you bet on Royal Mail being the long term winner in a fight with lower-cost more flexible parcel delivery firms? And would you take a punt on the company receiving a cost-saving windfall from the abolition of the USO?
Advice: Avoid
Why? Strong unions, a rapaciously competitive parcel delivery market and inbuilt costs which are unlikely to be relieved by regulatory reform.
Convatec
After completing an initial three-year turnaround of Convatec, the FTSE 100 medical equipment company, investors are now looking for Karim Bitar, the chief executive, to deliver on his commitment “to take it to the next level” (Alex Ralph writes).
Bitar, 58, who was parachuted in as chief executive in 2019 after Convatec slumped in the wake of its 2016 London float, has made progress in overcoming a reputation for inconsistent sales growth and margins. Having returned to the UK’s premier share index in 2022 and held an investor day on the next stage of the strategy, there is optimism that Convatec can deliver on its medium-term financial targets and close the large price-earnings discount with its peers.
Since an encouraging third-quarter update in mid-November and before Convatec’s full-year results in early March, the stock is once more back above the 225p 2016 float price.
At its last update, Convatec had tightened its organic revenue growth for the 2023 calendar year to between 6.75 per cent to 7.5 per cent, up from a previous range of 6 per cent to 7.5 per cent. It also reiterated guidance for its adjusted operating profit margin to expand to at least 20.5 per cent, at constant currencies.
Bitar also outlined targets of “mid-20s” adjusted operating margin in “2026 or 2027” and double-digit growth in earnings per share and free cash flow from 2024.
Despite delivering three “beat-and-raises” last year some investors remain hesitant.
Underpinning the optimism is Bitar’s strategy of making Convatec a more durable business by focusing on the chronic-care market in 12 countries and “making high-volume, high-quality consumables”. To improve innovation and cut product complaints, Convatec has more than doubled R&D investment to $100 million.
Keeping some investors on the sidelines is the sustainability of the recovery. High inflation has hindered margin growth in the past and remains a concern. The outlook for such headwinds will be in focus when Convatec updates the market on March 6.
Advice: Buy
Why: Room to close ratings gap with peers and benefits of revival strategy still to come
