Royal Mail enjoys parcels boost, and growth fades at Kingfisher

“Despite encouraging news on the latest vaccine candidate to report, the FTSE 100 started Thursday on the back foot, taking its cue from a sell-off in the US overnight,” says AJ Bell Investment Director Russ Mould.

“The report on the AstraZeneca and University of Oxford vaccine was less likely to move the dial as, unlike the other major vaccine updates so far, there was no detail on its efficacy.

“And while the prospects for the second half of 2021 are looking more encouraging thanks to advances made by science, the here and now is increasingly difficult with New York announcing more severe restrictions amid a surge in covid-19 cases across America.

“Brexit uncertainty continues to buzz in the background like a low-level headache and oil prices are giving back some of their recent gains ahead of a crunch meeting of OPEC at the end of this month. We could be in for a challenging few weeks.”

Royal Mail

“An online Christmas should, on the face of it, be brilliant news for Royal Mail. A much greater quantity of parcels will be delivered and already the pandemic has seen an eye-catching increase in parcel volumes as its latest results reveal.

“For the most part the company has coped with this increase in demand but boosting capacity comes at a price, with the recruitment of tens of thousands of extra staff for the festive period likely to see a big chunk of any extra revenue eaten up by increased costs.

“The challenge for the firm has been in trying to improve efficiency in a large unionised workforce and more than one management team has tried and failed to crack this particular nut. The company is also lumbered with the legacy of a letter operation in structural decline – though at least parcel revenue outweighed letters for the first time in the first half.

“All the while Amazon has moved from being a big customer of Royal Mail to doing an increasing amount of deliveries itself and it has deep pockets to fund investment in the kind of automated delivery solutions which Royal Mail could only dream of. Other nimbler competitors are also eating Royal Mail’s lunch.

“The latest incumbent in the hot-seat, Stuart Simpson, has only been in place since May and already faces a period which could define his tenure. This Christmas will be a period of real hope for Royal Mail but if it fails to step up and meet the challenge it could face a nasty New Year hangover.”

Kingfisher

“A slowdown in the pace of growth at Kingfisher has dampened market enthusiasm for what has been one of the success stories of 2020.

“Admittedly the slowdown has only happened in the past few weeks and one shouldn’t draw any conclusions about a change in fortunes for the business from such a short period.

“It just looks people in France and the UK rushed to buy goods before new lockdown measures came in, thus bringing forward some sales and causing what might only be a temporary reduction in the pace of growth.

“With talk of another lockdown in the UK in January to make up for any relaxed restrictions over Christmas, one might expect the strong demand for DIY to continue well into 2021.

“Admittedly people might not be so creative over the cold months and it could just be a new lick of paint inside the house rather than more ambitious projects seen in spring and summer. Yet the fact so many people are still spending a lot more time at home than normal should play to the strengths of Kingfisher.”

These articles are for information purposes only and are not a personal recommendation or advice.

The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.