For a company that has such great and interesting potential for the future, a disproportionate percentage of the stories written about Royal Mail focus on the past; specifically the price at which the UK government set the IPO.
From the early days of the IG grey market before the shares started trading, through to its first couple of weeks on the London exchange, investors have seen potential in what they believe is an undervalued company. It is worth remembering that the UK government still holds a 30% stake in the company. No doubt the government would have liked to be in a position to plan for the sale of the balance, but this seems less than likely given the current political environment.
Issues that have historically hung over the company have been the union’s strength in the company’s workforce and the inefficiencies that the company had when compared to the likes of Deutsche Post. However, while cost-cutting – and subsequent job losses – may have been an obvious move to bring about improvement, as a government-run company this would have been difficult prior to flotation. A workforce of over 150,000 was seen as bloated by the markets and a 1,600 reduction so far looks to be just the start of the reorganisation that is required, especially with a target of £50 million in cost-cutting this year.
The two largest parts to the business are the postal and parcel delivery services. As technology has improved, communication has increasingly taken the form of more instantaneous e-mail and texting; this has seen the volumes of letters decrease on an annual basis, though the company has still had to maintain the majority of the infrastructure. In contrast, parcel deliveries have been increasing year-on-year as high street footfall has decreased and online shopping (and subsequent delivery) has increased. Blessed with an extensive infrastructure and delivery service already in place, Royal Mail should be well-placed to take advantage of this change in the years to come.
Although the majority of press coverage has focused on the poor judgement shown by Vince Cable and his team on deciding an IPO price, the city has focused on the business outlook. Part of the reason that stocks were viewed with such a positive light was the guaranteed dividend and 6% yield that the 330p stock was offering. Equities continue to enjoy popularity with investors and, even with the share price having soared since its float, the anticipated 12% increase in the company’s profits up to £670 million points towards the potential profits yet to be fully tapped into.
Royal Mail shares currently sit some 70% above the IPO price even with the selloff in March/April; with a number of institutions setting price targets above 700p and one over 1000p, the city still believes there is value to be had. Even with the shares up 16% or 80p since the mid-April low, and the relative strength index having moved into overbought territory, Thursday’s figures could see the shares being forced even higher. The 564p has proven to be a level of support and only a close below this would see me change my positive outlook for the company.