Don't sell your Royal Mail shares, says Questor

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The shares may have fallen 5pcafter the annual results, but Questor Editor John Ficenec examines the numbers in detail

Royal Mail has warned of rising competition as it reported a 19pc rise in profits in its maiden annual results.

Shares in the company fell 5pc in early trading after chief executive Moya Greene said "the competitive environment on the parcels side is more intense ... [and] on the letters side, the headwind is direct delivery."

The Royal Mail is focusing on parcels, which now account for 51p of group revenues, as letters decline due to emails, the rise of social media and the ongoing growth in online shopping.

In its first set of results since its controversial £3.3bn stock market flotation in October, Royal Mail said that while parcel revenues rose 7pc, volumes were flat at one billion items delivered.

Revenues from letters fell 2pc to £4.6bn on a year earlier. Addressed letter volumes declined by 4pc but the trend improved over the year due to stronger economic conditions and one-off impacts such as energy companies writing to customers about price rises.

For the group as a whole, operating profits before transformation costs rose to £671m from £598m last year on revenues up 2pc to £9.5bn.

As part of steps to counter competition from rivals and retain its leadership in parcels, the Royal Mail will begin to distribute parcels on Sundays in a large-scale trial this summer.

Despite the drop in Royal Mail shares on Thursday, they were still trading around 65pc above their 330p float price at 8.35am.

Questor was an early supporter of the Royal Mail flotation. Back on September 27, we advised “Get in quick and buy Royal Mail” at 330p. The shares have since returned gains of more than 62pc. We downgraded the shares last year (565p, November 28) as the rating got ahead of itself at 17 times forecast earnings. The shares fell more than 7pc yesterday.

Cost cutting and revenue growth are expected to increase the adjusted earnings at Royal Mail to about £500m in the year ended March 2015. The closest European sector peers are rated on about 9.5 times adjusted earnings, which gives a share price of 475p. Throw in about half the property, and the shares around 500p look reasonable. Royal Mail issued a cautious outlook, proving life in the private sector is tough, but Questor believes they remain a solid investment for the long term. Hold.