January 22, 2015 / 7:47 AM / 3 years ago

UPDATE 2-Royal Mail shares lifted by parcels progress

* Nine-month group revenue up 1 pct

* UK parcels revenue improves from half-year

* Performance offset by fall in letters revenue

* Shares up 4 pct (Writes through, adds quotes, shares)

By Neil Maidment

LONDON, Jan 22 (Reuters) - Britain’s Royal Mail announced an improved performance at its key parcels business over a busy Christmas period, helped by price promotions, the Black Friday retail rush and its own longer business hours in an increasingly competitive market.

The company’s shares have dropped by about 28 percent from their post-privatisation peak on concern over a squeeze on parcel prices caused by rising competition, the emergence of a rival letter-delivery service and regulatory disputes, but Thursday’s update suggests that restructuring and improvements to its parcels service are improving its fortunes.

Group revenue growth slowed as expected, from 2 percent at the half-year to 1 percent for the nine months to Dec. 28, but rising parcel volumes and sales gave investors cause for optimism, lifting the shares 4.3 percent to 449 pence by 1013 GMT.

“UK parcel volumes have improved slightly and December flows were particularly strong, but the main improvement is in revenue,” Cantor analyst Robin Byde said, though he reiterated a “sell” rating, citing rising competition expected in 2015.

Royal Mail’s efforts to compete more effectively in parcels have seen it extend its network’s hours and those of collection offices. This and a drop in prices helped the UK parcels business, worth half of group sales, to lift volumes by 3 percent for the nine months.

Parcels revenue was flat against the same period last year, representing an improvement from the 1 percent decline recorded at the half-year mark. In December Royal Mail delivered 120 million parcels, more than some competitors handle in a year.

TOUGH MARKET

Though expanding rivals remain a concern, the competitive nature of the market was highlighted when courier City Link went into administration in December, while others suffered reputational damage after struggling to handle the Black Friday demand spike.

Rival UK Mail said this month that it handled record parcel volumes in the build-up to Christmas.

Royal Mail Chief Executive Moya Greene said the Christmas performance and tight control on operating costs meant it was confident of meeting full-year expectations but warned of tough times ahead in parcels delivery.

“The conditions of overcapacity and too many players chasing traffic is going to continue to put pressure on prices for the next couple of years,” Greene told Reuters.

In November Royal Mail said growth in the UK parcels market would fall from 4-5 percent to 1-2 percent for at least two years as key player Amazon delivers more of its own packages and others add capacity to deal with rising online retail demand.

The improved parcels performance included a slight boost from City Link’s demise but was offset by a slowdown in letters, where 1 percent revenue growth at the half-year slowed to flat for the nine months on volumes down 3 percent. Its European parcels arm, GLS, fared better with revenue up 8 percent.

Royal Mail said that analyst consensus for full-year operating profit, before transformation costs, is 585 million pounds ($885 million). (Editing by Kate Holton and David Goodman)

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