Yesterday, the Royal Mail (LSE:RMG) share price shot up 9%+ to trade just over 480p. This put the gain over a one-week period at around 12%, and over 60% in the past year. The main driver in the short run was the release of half-year results that contained several reasons for optimism. Alongside the results, I think that the outlook for the company has improved from where it was six months ago. Here are the details.
Pressures from earlier in the year ease
Back in August, I wrote about the stock in detail. At that point in time, I was sceptical about how well the company could perform in 2021. I noted falling parcel volumes versus 2020 and how the pandemic bump might have been just that — a temporary bump. I was also concerned about thin operating profit margins.
The release of the half-year results goes some way to putting these concerns to one side. For a start, Royal Mail domestic parcel volumes were up 33% versus H1 2019-20. Although these volumes were still down 4% compared to H1 last year, I do need to take into account the higher demand seen during that period from the pandemic. So a fall of 4% is actually not a bad figure in comparison.
Aside from volumes, the financials also looked good. Revenue was up 7% to over £6bn, and operating profit surged. It came in at £311m, up £331m versus last year. Even after taking into consideration the large restructuring costs from last year, it’s still an impressive figure.
Naturally, the Royal Mail share price jumped when the results were released.
Good reward potential, but also risks
In terms of the outlook, there are more reasons to be positive. The main one is to do with the special dividend of £200m and the extra £200m set aside for share buybacks.
The business commented that it’s able to do this because “we believe that both Royal Mail and GLS will be able to fund their respective investment pipelines from future cash flows”.
This statement tells me that Royal Mail is optimistic about future revenue opportunities. If not, then the business would have likely held on to the excess cash flow as a buffer for hard times.
Despite all this good news, there are still risks around the Royal Mail share price. One is simply that Royal Mail might struggle to meet its financial goals over the next year. In that case, with cash flow tight, it might be forced to increase net debt levels. Given that it’s paying out a £200m dividend, having tight cash flow in the near future could reflect badly on management.
Another risk is that competition in this sector is still very high. One strong half-year doesn’t mean that Royal Mail is immune to the impact of other providers chipping away at market share.
Upside for the Royal Mail share price
Overall, I think the shares can continue to move higher on the basis of the positive outlook. The share price is still some way off the levels seen back in the spring, so I’m looking to buy now to target 600p+.
Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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