Will further strikes hit Royal Mail owner IDS’s share price?

Strike action and weaker demand has weighed on Royal Mail owner International Distribution Services’ share price this year. Newly announced strikes over the Christmas period have the potential to further hit the company’s revenues and hand business to competitors. The company’s recent interim results showed a loss for the first six months of the year, despite profits from logistics operation GLS.  

Royal Mail owner International Distribution Services’ [IDS.L] (IDS) share price finally delivered some good news to investors with a 6.32% gain on Friday to close the week at 252.3p. The jump came the day after interim results that contained no further cuts to guidance, even as it swung into a loss for the first six months of the financial year.

However, year-to-date IDS’s stock is down 50.14% as Royal Mail suffers from weaker demand and an ongoing dispute with the Communication Workers Union (CWU) over pay and working conditions sap at sentiment. On Friday, the union upped the stakes by announcing additional strike days over the festive season that could potentially hand business to Royal Mail’s rivals.

Royal Mail strikes hit IDS share price

IDS’s stock price had been delivering second class results for investors over the autumn. The stock plummeted to 180.45p on 29 September and remained subdued through October as talk of strike action dominated.

Since 3 November, the share price has gained 17.25% but a newly announced batch of strikes could deliver volatility in the stock. On Friday, the CWU said members would strike on  9, 11, 14, 15, 23 and 24 December. This is on top of strikes on 24, 25, 30 November and 1 December that target Black Friday.

Strike action hands business to rivals

Strike action over the Christmas period means less revenue for Royal Mail, potential volatility in the share price and lost business going to rival services.

The Financial Times reports that UPS [UPS] and Yodel say they have seen an increase in retailers looking to use their services this Christmas.

Rick Fletcher, managing director for UPS in the UK, told the paper that retailers had been “racing” to get in touch ahead of the strikes, with ecommerce orders expected to be above pre-pandemic levels despite the cost of living crisis. Yodel chief executive Mike Hancock said that the company was handling 10% more parcels than normal, although he added that the industrial action was a “short term win”.

Retailers ditching Royal Mail for rivals over Christmas adds to IDS’s woes. In the first six months of the financial year, the Royal Mail side of its business posted an adjusted operating loss of £219m. This was blamed on weak parcel volumes, a lack of progress on talk with the union, and the impact of strike action.

To mitigate against losses, Royal Mail plans to cut Saturday deliveries which could save between £125m and £225m a year. This needs government agreement to change the law to allow a five-day-a-week operation as the postal service is required to deliver letters six-days-a-week under its “Universal Services Obligation” – something that could meet opposition from backbench MPs on both sides of the house.

Royal Mail looking at a full year losses

Losses from Royal Mail saw IDS post a pre-tax loss of £57m in the first half of its financial year, despite the £162m operating profit made by its logistics business GLS.

IDS said it expects Royal Mail to make a full-year adjusted operating loss of around £350m–£450m. This figure doesn’t include the impact of the recently announced strike action. The company said that continued macroeconomic pressures and decline in Covid-19 test kit deliveries would contribute to a decline in revenue.

Chairman Keith Williams said “the difference between the performances of [Royal Mail and GLS] could not be more stark” with the logistics business being able to adapt to inflationary pressures. Expectations are that GLS will see high single digit percentage revenue growth and €370m–€410m operating profit for the full year.

IDS pulled the dividend in the results, saying the situation would be reviewed next May.

Berenberg cuts price target on IDS

After the results, Berenberg cut its price target on the IDS share price from 480p to 370p in a note to investors, saying the outlook continued to be “challenging” and that there was no sign of a resolution between IDS and the union. Despite the pessimistic tone, the analysts maintained a ‘buy' recommendation and suggested that “the shares seem to have found a floor at around 200p, possibly reflecting the backstop valuation of the GLS asset”.

“The shares are now in deep-value territory in our view, but a deal with the unions is probably needed for the shares to perform," said the analysts.

Of the 13 analysts polled by Refiniv, IDS has a median price target of 250p, representing a 0.9% downside on Friday’s close.