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Labour Targets Royal Mail and Centrica Update Market

Royal Mail

Firms in the firing line for Labour’s nationalisation plans have reported their latest results, including Royal Mail (RMG), whose shares have fallen nearly 17% to 192p after warning that the next financial year will be tough. In contrast, investors warmed to the latest results from British Gas owner Centrica (CNA), whose shares climbed nearly 10% to 78p.

Royal Mail blamed the UK economy and political uncertainty for declines in its core letters business and its “Journey 2024” transformation programme being behind schedule. Its UK business is expected to be loss-making or break even in the financial year to March 2021, which has spooked investors.

The financial results for the six months to the end of September were, however, positive, with a 5% rise in group revenue and a rise in pre-tax profits from £33 million to £173 million, a rise of more than 400%. But more alarming to investors is a steep increase in net debt – in the half-year to September 2018 net debt was £470 million, but that has risen to £1.3 billion this year.

Royal Mail is expected to receive a £30 million boost from the extra mail deliveries involved in the General Election, such as postal votes and party leaflets, but the vote itself could cast the company – which only floated in 2013 – back in public ownership. Royal Mail has this week managed to see off the prospect of industrial action at Christmas by postal workers but it has warned that strained industrial relations could hold it back in the next few years.

The company floated at 330p in 2013 as part of a discounted public offering that drew in millions of retail investors, including postal workers themselves. The shares surged to 455p on the first day of trading, leading to accusations that the then coalition government had priced the IPO too low; shares hit 631p in May 2018 but are now below 200p after the latest 37p fall.

“Royal Mail’s investment case always rested heavily on the argument that years of public ownership had left the group bloated, underinvested and with lots of low hanging efficiency savings to harvest,” says Nicholas Hyett, equity analyst at Hargreaves Lansdown. “But any low hanging fruit is long gone, and a heavily unionised workforce is making future cost savings difficult, if not impossible, to deliver.”

British Gas Owner on Labour's List

Centrica’s share price has suffered similar weakness to Royal Mail in recent years, with the prospect of a Labour government’s national energy plan weighing on companies such as National Grid and SSE. Labour has upped the rhetoric on nationalisation ahead of the General Election next month, with Shadow Chancellor John McDonnell threatening to delist companies from the stock exchange if they don’t meet climate change targets.

The company’s profits have also been held back by the government’s energy price cap - Morningstar analyst Tancrede Fulop estimates that the cap will knock 75% off the retail enery arm's profits for this financial year. "We are unconvinced by the group's strategy. Its only advantage is to make Centrica a suitable prey for an oil major seeking to diversify in retail energy," he says.

Ian Forrest, investment research analyst at The Share Centre, says of the latest update: “There were some positive signs but the energy giant has had a dismal year so any signs of stability in its trading are notable.” He adds that the share price bounce “highlights the low level of expectations in the market more than anything else”.

Centrica’s residential energy arm has been shedding customers in recent years as people use online switching services to get cheaper deals on their gas and electricity. While the company lost 107,000 energy customers in the last four months, there was a 136,000 increase in customer accounts overall as people signed up to “services and solutions” such as British Gas boiler protection and servicing contracts. The full-year financial outlook remains unchanged, and Centrica has lowered spending forecasts from £900 million to £800 million and increased costs savings forecasts by £50 million to £300 million. Full-year results are due in February 2020.