Royal Mail shares tumble as turnaround plan lags

(Reuters) - Royal Mail is already running behind schedule with planned reforms as it grapples with threatened labour unrest and a slowing UK economy, it warned on Thursday, sending shares in Britain’s former postal monopoly down 17%.

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The company, which announced plans to invest 1.8 billion pounds ($2.3 billion) in a five-year turnaround programme in May, said it was investing more ahead of the general election next month and Christmas to try to ensure it hits service targets at the busiest time of the year.

Revenue and cost pressures could result in break-even or loss-making position for the UK business in 2020-21, the company said as it tries to refashion itself as an international business focused on parcels.

“People are posting fewer letters and receiving more parcels. We have to adapt to that change,” said Chief Executive Rico Back.

“The challenging financial outlook in the UK means now, more than ever before, we need to make the changes required - and accelerate them - to ensure a successful UK business,” he added, describing the turnaround as “behind schedule”.

Shares of the FTSE 250 company fell as much as 17.6% to 190.5 pence in early trading, their lowest level since August. They were priced at 330 pence when the company was sold off by the state six years ago.

For its UK operations, it plans on improving productivity, by installing more machines in its mail centres to automate the sorting of parcels and introducing one-day deliveries.

In the short-term Royal Mail, which employs around 143,000 people in the UK, is embroiled in a legal dispute with its largest union, over a strike that threatens to disrupt operations at the busiest time of the year.

“We want to change, working with our unions, but we can only do so through an affordable resolution,” the company said as it expects further margin pressure in core UK business, with less productivity as a threat because of potential strikes.

Underlining the challenges it faces, Royal Mail said it expected the number of letters sent to fall by 7-9 percent in the 2019-20 financial year.

“Any low hanging fruit is long gone, and a heavily unionised workforce is making future cost savings difficult, if not impossible, to deliver,” Nicholas Hyett, Equity Analyst at Hargreaves Lansdown said.

Overall operating profit for the six months ended Sept. 29 benefited from higher parcel volumes and came in at 61 million pounds, compared with a loss of 4 million pounds last year.

The company, which targets high growth over the next few years from its GLS ground-based parcel network, said the division posted a near 17% jump in adjusted operating profit including acquisitions, bolstered mainly by markets in Germany, France and Italy.

Reporting by Yadarisa Shabong and Shashwat Awasthi in Bengaluru; editing by Uttaresh.V