Royal Mail shares rally on plans to shake-up postal service but analysts warn it could prove a non-starter

Beleaguered Royal Mail investors were given a boost as plans to shake it up lifted its shares – but analysts said they could prove a non-starter.

Regulator Ofcom said it may be allowed to cut deliveries to five days a week, or even three, or to deliver letters more slowly, to avoid becoming ‘unsustainable’.

Shares in the group, now known as International Distribution Services (IDS), rose 5.1 per cent, or 13.3p, to 275.2p and are up 11.9 per cent since the weekend.

That has added £280million to its value and is a boost for the army of ordinary shareholders who piled in when Royal Mail was privatised in 2013, and posties who were given free shares.

But the price is still well below the 330p value at the time of the float. And analysts say the proposed changes look unlikely to go through, with the Government having already rejected cutting the six-day service.

Shake-up: Regulator Ofcom said Royal Mail could be allowed to cut letter deliveries to five or even three days a week, or to deliver letters more slowly

Ofcom called for a ‘national debate’ on the future of Royal Mail, which has seen the volume of letters sent halve since 2011.

It centres on proposed changes to the Universal Service Obligation (USO), which requires it to deliver post six days a week to every address in the county at the same price.

‘The universal postal service risks becoming unsustainable as people send fewer letters and receive more parcels, meaning reform is necessary to secure its long-term future,’ Ofcom said.

Victoria Scholar, head of investment at Interactive Investor, said shares traded higher yesterday ‘reflecting the regulator’s openness towards change’.

Scholar said that after years in which its calls to scrap the USO model were rejected ‘the tide could be turning’, but noted opposition to change from the Government and the Communication Workers’ Union.

Changes in the law would be needed to cut the number of delivery days. But Liberum analyst Gerald Khoo was sceptical about change, maintaining a ‘sell’ rating and a 180p target price on the stock.

‘There is no way Ofcom is going to do something so politically controversial with no public support because the Government will lean on it,’ he said.

The regulator estimates that Royal Mail could save £100million to £200million a year if letter deliveries are reduced to five days and £400million to £650million if cut to three.

It added that if most letters were delivered within three days, savings of £150million to £650m could be achieved.

Martin Seidenberg, chief executive of IDS, said the report showed reform was ‘urgently needed’ and that it was ‘not sustainable to maintain a network built for 20bn letters when we are now only delivering 7bn’.

Royal Mail lost £1billion in the financial year ending in March 2023, as it was hit by strikes and a weaker online market.

It was also fined £5.6million last year for failing to meet delivery targets. But last week it said it had enjoyed its best Christmas performance for four years.

Investors have been on a roller-coaster ride since 500-year-old Royal Mail was listed. 

Shares topped 600p in 2018, fell below 140p and spiked in 2021 thanks to online shopping and test kit deliveries. They have been under 300p for more than 18 months.

This post first appeared on Dailymail.co.uk