ROYMF - International Distributions Services: Stock Rebounding But Challenges Remain

2023-04-18 05:00:22 ET

Summary

• International Distributions Services plc has continued to see growth across the domestic parcels segment.
• Additionally, signs of industrial action abating are starting to emerge.
• While this is encouraging, the stock could still remain volatile until the situation in this regard becomes more clear.

Investment Thesis: While International Distributions Services ( OTCPK:ROYMF ) has the potential to see a growth rebound - this is likely to significantly hinge on an abating of ongoing industrial disruption.

In a previous article last July, I made the argument that International Distributions Services (formerly Royal Mail) is unlikely to see significant upside in the short to medium term, owing to lower parcel and letter volumes as well as strike action threatening to further reduce deliveries.

Since my last article, the stock has seen further downside, but recently saw a boost in upside upon reports that the company has reached an agreement in principle with the Communication Workers Union regarding worker compensation:

The purpose of this article is to assess whether International Distributions Services could continue to see a rebound in upside going forward, particularly taking recent financial performance into consideration.

Performance

While the company's quick ratio (current assets less inventories all over current liabilities) has remained above 1 over the below period - this had dropped over the course of a year from 1.18 to 1.08. For September 2022, we can see that the ratio dropped further from 1.08 to 1.01.

Source: Figures sourced from International Distributions Services plc - Results for the Half Year ended 25 September 2022. Quick ratio calculated by author.

With the ratio technically remaining above 1 - the company still has sufficient liquid assets to cover its current liabilities. However, the downward trajectory will likely be increasingly concerning for investors who may look for evidence of a rebound in this metric going forward.

When comparing 2019 and 2022 performance for the three months ended June and December across the Domestic Parcels, International and Letters segments - we can see that Domestic Parcels has performed the strongest by far - with growth in June particularly strong as compared to 2019 levels. By contrast, the International and Letters segments still remain down as compared to 2019:

The domestic parcels segment accounts for a much greater portion of revenue as opposed to the international segment - with revenue of £855 million as compared to £204 million for December 2022.

In this regard, growth in the domestic parcels segment in future quarters will be a significant determinant of overall revenue growth going forward. Should we see the impact of industrial disruption start to abate going forward as the company continues to strive for an agreement with its workforce over pay conditions - then this could serve as a significant growth driver for the domestic parcels segment.

While an alleviation of strike action and an abating of post-COVID labour shortages more generally could also allow the International segment to recover - the decline in addressed letters revenue remains structural. Even as far back as 2017 , Royal Mail had been seeing a continued decline in letter volumes - as electronic correspondence continued to grow, a trend which only accelerated during the coronavirus pandemic. This is a global phenomenon, with the Universal Postal Union reporting that global domestic letter volume was down from 320 billion pieces in 2016 to 259 billion in 2020.

In this regard, investors are likely to pay particular attention to growth across the domestic parcels segment - as it is likely that the company will become increasingly dependent on this segment to sustain overall revenue growth.

Risks and Looking Forward

Going forward, a big determinant of the recovery in the company's stock price is the extent to which a resolution can be negotiated to the industrial disruption that the company has been experiencing. While initial reports in this regard are encouraging - the stock could still remain volatile until the situation becomes more clear.

Additionally, while the domestic parcels segment continues to see growth - investors will also want to see evidence that revenue can continue to grow while also maintaining a healthy cash position. We can see that the quick ratio has been falling, and a decline below 1 may raise concerns for investors that the cost of funding further revenue growth is having a detrimental impact on cash reserves.

Conclusion

To conclude, International Distributions Services has continued to see growth in domestic parcels in spite of challenges across other areas. In my view, the degree to which this segment can continue to see growth, as well as the eventual conclusion to ongoing industrial disputes, will ultimately determine the growth trajectory for this stock over the longer-term.

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