Why Investors Need to Be Watching Royal Mail PLC (RMG)

Hamzah Yacoobali, The London School of Economics and Political Science

Overview

It has been 8 years since the UK government sold a 60% stake in Royal Mail through an Initial Public Offering on the London Stock Exchange. More than 700,000 members of the public bought shares at a launch price of £3.30. The price soared by over 40% on the first day of trading to 489p, and continued to rise over the coming months, reaching a peak of £6.15 in January the year after. Since then, what has happened and is it still worth purchasing a share while online sales are still strong with more deliveries being required.

Analysis

A price of 330p initially seems to be a ‘definite buy’, so much so that there was an inquiry and debate in the House of Commons into RMG shares being floated too low. If you are were one of those who cashed in early at that price, how well off would one be now?

  • Current stock price(correct to time of publishing article) to purchase one share is: £4.90
  • Dividend payments this year are predicted to be: 10p/share
  • A low of 124.3p was seen during the pandemic
  • 0.52 in EPS Earnings Per Share for its second fiscal semester of 2020 according to their report

One ought to know that their CEO, Simon Thompson appointed 11th January 2021, has a gargantuan task ahead of him with an impending £1.8 billion overhaul by adapting the business to cope with growing parcel deliveries instead of letters, where they have had a massive decline. The lack of investment in technology has led to a prolonged catch-up for their infrastructure to be fit for the incumbent purposes of the modern day.

It’s been quite the reversal of fortunes for the previously struggling Royal Mail as activity over the Christmas period spilled over into the new year, with the earnings upgrade to £700 million well ahead of its adjusted operating profit of £325 million in the previous year.

The latest update comes after Royal Mail said in a trading update on 10 March that its recent letter volume and revenue trends have been ‘more robust than anticipated’, with advertising, business and stamped mail all performing above its previous expectations. Sending letters is slowly but surely starting the path to become obsolete with many online digital applications giving immediate access to desired documents, meanwhile, cutting time off delivery and cost of purchasing the service. While that part of the company decays, complementarily, the larger parcel part not just expands, but expands exponentially.

Parcelforce Worldwide, more commonly known as ‘Parcelforce’, is one of the trading subsidiaries of RMG, has seen sales volumes increase with International parcels fuelling most of rise. Royal Mail also gave an update on its GLS international logistics unit, which is expected to more than double its operating profit to £427.6 million over five years. From the 2020 financial year to the 2025 financial year, GLS is also expected to grow revenue at a compound annual growth rate of around 12%, from £3.09 billion.

Conclusion

Leadership does not seem to be the strong suit, the tumultuous years accumulated has without a doubt led to the business being vulnerable during the pandemic with an overbearing capacity they could not handle, especially when they were required to help the most. Despite the decline in letters is hard to reverse, Royal Mail still has significant opportunities on the parcel side and to grow its overseas operations. Clear legislation is required from political institutions as unfortunately, it doesn’t yet know the full impact of higher costs of cross-border delivery like many other businesses. There is growing anecdotal evidence that many companies in the UK no longer feel it is worth bothering to sell goods to overseas customers because of a large increase in delivery costs and paperwork. That being said and bringing this to an end, it must be said that investors should observe the stock for the moment, wait for the dip and if there is one, subsequently buy in.

Royal Mail, a 500 year-old multinational postal service and courier company, will continue to trade for the foreseeable and is a safe investment should the proposed projects come to fruition and ceteris paribus, the prices have been a rollercoaster but on average and relative to the initial price the value has risen. Deliveries are demanded, supply is expanded, perhaps time to get invested?

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