Will 5-day delivery boost IDS share price?

Royal Mail-owner IDS share price has gained in September following Ofcom’s decision to look into whether Royal Mail can end Saturday deliveries. The stock posted more gains last week after the regulator proposed a solution to end the dispute between Royal Mail and Whistl. But with IDS’s share price having rallied since the start of the summer, is there any upside left?

• IDS’ share price posts a 37% return since the start of June, including a 7% gain in September.
• Ofcom is looking into whether Royal Mail can end Saturday deliveries, which could save the carrier millions.
• The regulator also weighs in on Royal Mail’s dispute with Whistl.

With the end of industrial action earlier in the summer, Royal Mail-owner IDS’s [IDS.L] share price has finally been delivering for its shareholders. The stock has posted a 37% gain since the start of June, while year-to-date, it’s up over 26%, closing Friday 22 September at 269.3p. That form has continued into September, with the IDS share price up 7.2% so far this month. Boosting sentiment is news that regulator Ofcom will look into Royal Mail’s universal service obligation, which requires it to deliver letters across the UK six days a week. A switch to five days could potentially save Royal Mail millions.

IDS share price gains as Ofcom looks at customer needs

Ofcom has said it is looking into potential options for the future of the universal postal service.

“The universal service has been unchanged since the implementation of the current framework under the Postal Services Act 2011,” Ofcom said on Tuesday, 5 September.

The regulator added that “consumer demand for postal services has changed substantially” since the introduction of the Postal Services Act and that it was gathering evidence to see how the “universal service might need to evolve to more closely meet consumer needs”.

The background to this is a decline in parcel and letter volumes. In the first quarter of the year, Royal Mail parcel volumes fell 10% to 283 million, while letter volumes fell 8% to 1.7 million.

Royal Mail’s revenues dropped 4% year-on-year in the quarter to £1.8bn.

Last year the service lost a thumping £1bn as strike action and the ensuing disruption dragged on earnings. This pushed IDS into an overall £748m loss, with growth in the logistics business GLS doing little to absorb Royal Mail’s losses.

A couple of years ago, Ofcom found that Royal Mail could save £225m if it scrapped Saturday letter deliveries — a saving that would go some way towards strengthening the postal service’s financial position in the face of flagging volumes.

Whether Royal Mail gets the go-ahead to move to five-day deliveries depends on whether the UK government acts on Ofcom advice. Following Ofcom’s announcement, Business Secretary Kemi Badenoch said the end of Saturday deliveries and pickups would mean that Royal Mail “stops being the service which you want”.

Badenoch’s comments partly explain why the IDS share price dipped 1.7% on Tuesday; however, the stock closed the week 4.7% higher.

Helping boost confidence was, again, Ofcom, which proposed a way forward in the ongoing dispute between Royal Mail and logistics company Whistl. Whistl had raised concerns with the regulator over costs Royal Mail wanted to pass on in exchange for access to its letter network. In a draft proposal, Ofcom suggests that Royal Mail can pass on the costs of complying with its obligations to Whistl under access condition UPSA 5.3.

IDS share price forecast

IDS’ share price has rallied since the beginning of June following the end of a bitter dispute between Royal Mail and the Communications Workers Union over pay and working conditions. The dispute led to the announcement that Royal Mail CEO Simon Thompson would be stepping down from the top job.

A slight upswing in first quarter revenues to £3bn has helped sentiment, as has the group targeting an adjusted operating profit this year. The axing of 10,000 jobs last year should also save the business £150m over the next financial year.

The turnaround in the IDS share price will no doubt be welcome after last year’s 57% decline.

Whether it can get back to the 520p levels seen at the start of January 2022 is up for debate, but there seems to be more optimism around the stock than there was only a few months ago. The end of industrial action, further cost-cutting, and a mooted return to profitability for Royal Mail next year could all help.

JP Morgan raised its rating on IDS to ‘overweight’ this month, stamping a 310p price target on the stock, suggesting a 15% upside on Friday’s close. Among the analysts, IDS’ share price has a 12-month median target of 270p, suggesting a slim 0.3% upside.