Royal Mail shares: sell, hold or buy?

[RobertT]

http://www.hl.co.uk/news/articles/royal ... old-or-buy" onclick="window.open(this.href);return false;

It is a year 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, and continued to rise over the next few months, reaching a peak of £6.15 in January this year. Since then, the share price has fallen significantly. It currently stands at around £4, still well above the initial launch price but over a third lower than its January peak.

Now the dust has settled it seems a good time to seek answers to the following questions:

What has changed in the last nine months to account for the share price decline?
What opportunities and risks does Royal Mail face and how is it responding?
Is the dividend sustainable?
Is now a good time to consider buying Royal Mail shares?

Overview
The markets in which Royal Mail operates are changing rapidly. The UK, like many other countries, is experiencing a decline in letter volumes. In 2014, addressed letter volumes fell by 4%, and Royal Mail expects volumes to decline by 4-6% a year over the next few years.

At the same time expansion in e-retailing in the UK and across Europe is continuing apace. The UK has the highest e-retail expenditure per capita in the world, with around 10% of all retail sales conducted online. This is estimated to rise to 13% by 2017. Royal Mail is the market leader in the e-retail led UK parcel market, with an estimated 38% market share. It also operates one of the largest parcel delivery networks in Europe. Parcels now account for over half of group revenue.

Business segment/market Percentage of group revenue
Parcels 51
Letters & other mail 37
Marketing mail 12

Why has the share price fallen this year?

Although the global parcels market is growing, it is also very competitive. In July Royal Mail warned that revenues from its UK parcels business would be below expectations, due to increasing competitive pressures. Investors are particularly concerned about the emergence of new competitors such as Amazon, which is rolling out its own delivery network. While the threat from Amazon should not be overstated (the company accounts for only 6% of group revenues) it is clear that competition from both existing and new competitors is intensifying.

Royal Mail also faces competition in its UK letters business, with some operators choosing to collect, process and deliver mail directly to the recipient without the use of the Royal Mail network. TNT Post UK poses one of the biggest threats. Although it currently has less than 1% of the market, the group has focused on the more lucrative, densely populated urban areas, and plans to roll-out to 42% of UK addresses by 2017.

To complicate matters further, Royal Mail is currently involved in a regulatory dispute with TNT Post. In addition, it is being investigated by the French competition authority into alleged antitrust law breaches in France. On 9 October Royal Mail announced it has entered into a settlement agreement with the French competition authority and has made a provision of £18 million to cover future fines and legal costs. The investigation remains ongoing and the full amount of any fine is not expected to be determined until the second half of the 2015-16 financial year.

How is Royal Mail responding?

Royal Mail remains intent on growing its UK and European parcels business through investments in technology and service. Recent initiatives include the introduction of Parcelforce Sunday deliveries for online customers and the launch of a click & collect network with 10,500 participating post offices. If these measures are successful this could help Royal Mail to combat these competitive pressures.

The group is also focused on reducing costs and increasing productivity to help offset the decline in its letters business. This includes upgrading and modernising its IT infrastructure and reducing headcount. The company recently announced a management reorganisation which will result in the loss of over 1,000 jobs. The programme is expected to deliver £50m of annualised cost savings.

Royal Mail has committed to working closely with the regulator to overcome the competitive pressures in the letters business. As a regulated entity, Royal Mail is required to deliver a six-days-a-week service throughout the UK, to stringent quality standards and at a uniform, affordable tariff. Its competitors do not have these constraints, and can cherry pick the most profitable areas. This threatens Royal Mail’s ability to generate a reasonable rate of return (to which it is entitled by the regulator). The group has made a formal submission to Ofcom, calling for it to respond to this issue as soon as possible.

Our verdict

The opportunities for Royal Mail, in particular the growth of online retailing, are substantial. Following the privatisation it also has significant scope to reduce costs and increase profit margins. The current operating margin of 4.6% compares with 8 to 10% for most of its peers.

Royal Mail also benefits from a very cash generative business model and this allows it to reward shareholders with an attractive dividend. In 2014 the company reported a dividend of 13p. This year, analysts are predicting the payment will rise to 21p, meaning the shares currently offer a prospective yield of over 5% . The dividend is well covered by cash flows and supported by a solid balance sheet, with net debt of just £555m at year end 2014 (a 39% reduction on the previous year). The group has a significant London property portfolio, including a 14 acre site in Nine Elms, an acre site at Mount Pleasant, and a 1 acre site at Paddington train station. Proceeds from property disposals could be used to further reduce debt over the next few years and support dividend payments. The dividend, therefore, appears sustainable in our view.

There are challenges that need to be overcome. Interim results are out on 19 November and will be closely scrutinised for signs that Royal Mail can respond to competitive pressures (you can sign up here for an update). Many of the challenges facing the company seem to have been priced in, and the valuation looks more appealing following the share price decline, with current market consensus recently stabilising as a hold.

[circles]

The shares will be worth nothing by the time we get to cash them in .

[NWpostie]

Royal mail is too big to fail, I think in the long term analysis shares are a long term investment if the firm is big enough with potential to expand its market repertoire incorporating its extensive network. it would require a bit of forward thinking and market research.

[Darren Bent]

I am planning to wait and see what happens and hope it will be ok to sell them in 4 years time tax free, but it depends on the situation at the time.

[Lounge Lizard]

Royal mail is too big to fail, I think in the long term analysis shares are a long term investment if the firm is big enough with potential to expand its market repertoire incorporating its extensive network. it would require a bit of forward thinking and market research.

"Royal mail is too big to fail" - like the banks ?

[NWpostie]

Royal mail is too big to fail, I think in the long term analysis shares are a long term investment if the firm is big enough with potential to expand its market repertoire incorporating its extensive network. it would require a bit of forward thinking and market research.

"Royal mail is too big to fail" - like the banks ?

True, allowing the banks to fail would be unthinkable the damage to the economy would be politically unfeasable, imagine if RM were allowed to fail no one could cover our national network over night.

[baldrick]

Royal mail is too big to fail, I think in the long term analysis shares are a long term investment if the firm is big enough with potential to expand its market repertoire incorporating its extensive network. it would require a bit of forward thinking and market research.

"Royal mail is too big to fail" - like the banks ?

True, allowing the banks to fail would be unthinkable the damage to the economy would be politically unfeasable, imagine if RM were allowed to fail no one could cover our national network over night.

You just have to see how big business and the media used to start shouting about how it damages business and the economy when there has been industrial action in Royal Mail in the past.
Of course they used to suggest that the solution was to privatise RM. Now it is privatised, the Government can't allow it to fail, as they couldn't with the rail network.

[Spy]

Definitely a BUY.
The scope to save money is vast. Not least moving to a 5 day week eventually.
Plus all the "ghosting" that still goes on despite the agenda for growth agreement.
That said, I think that when the opportunity to sell our free shares becomes available in 2 years the majority will sell. Thus causing a downward spiral of the price in anticipation of this. Factor in SAYE a year later and more selling another year later when your gains are tax free and I think that this will suppress the price from where it stands then.
All in all I think that a 5 year plan from now could reap huge rewards as opposed to savings in a bank.
Bear in mind the property portfolio RMG have. Paddington has just been sold for £111,000,000 . When the RNS was released last week the share price was £3.90. Now £4.40. What price mount pleasant now that Boris Johnson has approved RMG's vision for 700 mainly luxury homes. When planning permission is granted the site could easily be worth the same as RMG as a company, 4 billion. Doubling the share price. And lets not forget that next year a decision will be made about DSA pricing. How much more traffic will we get back when it's not economically viable for TNT et al to use our network.
BUY BUY BUY.

[heapsy]

Definitely a BUY.
The scope to save money is vast. Not least moving to a 5 day week eventually.
Plus all the "ghosting" that still goes on despite the agenda for growth agreement.
That said, I think that when the opportunity to sell our free shares becomes available in 2 years the majority will sell. Thus causing a downward spiral of the price in anticipation of this. Factor in SAYE a year later and more selling another year later when your gains are tax free and I think that this will suppress the price from where it stands then.
All in all I think that a 5 year plan from now could reap huge rewards as opposed to savings in a bank.
Bear in mind the property portfolio RMG have. Paddington has just been sold for £111,000,000 . When the RNS was released last week the share price was £3.90. Now £4.40. What price mount pleasant now that Boris Johnson has approved RMG's vision for 700 mainly luxury homes. When planning permission is granted the site could easily be worth the same as RMG as a company, 4 billion. Doubling the share price. And lets not forget that next year a decision will be made about DSA pricing. How much more traffic will we get back when it's not economically viable for TNT et al to use our network.
BUY BUY BUY.

I agree totally. been watching the RM share price yoyo for a few weeks. I bought into the company as part of a long term strategy. Too many people are thinking short term here because they don't fully understand how the markets work.

[toomuchcoke]

That said, I think that when the opportunity to sell our free shares becomes available in 2 years the majority will sell. Thus causing a downward spiral of the price in anticipation of this. Factor in SAYE a year later and more selling another year later when your gains are tax free and I think that this will suppress the price from where it stands then.

Definitely agree with the above, though I think it'll be the first opportunity for any selling that has the most impact. ~84% of the free shares went in the first batch after all. Some people will hang on to do both lots in one go, and some will probably hang on till 5 years. But either after the 15/10/2017 or 09/04/2028 is when I expect to see the a big splurge of sells with the consequent downward pressure on the share price. The SAYE shares and the free shares at 5 years are likely to be less on an impact IMHO. The SAYE shares will be a smaller chunk of the company, and from what I hear around my office I doubt anyone is planning on hanging on till 5 years just to sell.

All in all I think that a 5 year plan from now could reap huge rewards as opposed to savings in a bank.
Bear in mind the property portfolio RMG have. Paddington has just been sold for £111,000,000 . When the RNS was released last week the share price was £3.90. Now £4.40. What price mount pleasant now that Boris Johnson has approved RMG's vision for 700 mainly luxury homes. When planning permission is granted the site could easily be worth the same as RMG as a company, 4 billion. Doubling the share price. And lets not forget that next year a decision will be made about DSA pricing. How much more traffic will we get back when it's not economically viable for TNT et al to use our network.
BUY BUY BUY.

If you really want to watch a share portfolio shoot for the stars you need to be reinvesting the dividends as you go. Alas dealing charges can get in the way there unless you are receiving large dividends and/or investing fresh cash of your own. (But to given an example, my non-Royal Mail shares currently yield ~3.95% but ~7% of my portfolio exists because of reinvested dividends!)

However there is an added risk in owning shares in your employer. Take the worst case scenario of your employer going bust. - you're likely out of a job and your shares are probably worthless too. So whilst I don't think RMG.L is a bad company to own shares in, I won't be buying any extra beyond the minimal amount I'm throwing into the SAYE scheme. (Though if they offer more SAYE schemes in the future I'll probably put the minimal amount into those too.)

[Spy]

I have not bought any RMG shares but would not mind getting in at the current price. The upside will always be there at this price until we are a fully fledged PLC in my opinion.
The volatility that is currently associated with RMG share price is unbelievable for a FTSE 100 company.
This is more akin to AIM, which is where I like to invest.
100% upside from here in the next 3 years but I prefer the 1000% + or lose everything start up companies.

Look at Bushveld Mining ( Ticker: BMN ). Especially the geography surrounding the area that it's drilling in. Not to mention the board and the possible platforms going forward. I'm prepared to lose all I have invested but I really don't think that will happen. 2.9p to buy. I've made my mind up.

[aposter]

Look at Bushveld Mining ( Ticker: BMN ). Especially the geography surrounding the area that it's drilling in. Not to mention the board and the possible platforms going forward. I'm prepared to lose all I have invested but I really don't think that will happen. 2.9p to buy. I've made my mind up.

Thanks for the heads up, got to be worth a few hundred squid

[Spy]

Look at Bushveld Mining ( Ticker: BMN ). Especially the geography surrounding the area that it's drilling in. Not to mention the board and the possible platforms going forward. I'm prepared to lose all I have invested but I really don't think that will happen. 2.9p to buy. I've made my mind up.

Thanks for the heads up, got to be worth a few hundred squid

Only in my opinion. I am prepared to lose all I've invested as stated, as well as averaging down if / when I can afford it

[NWpostie]

Shares are rising once it became that private couriers cannot cope with the Christmas pressure and poor delivery standards.

Quality will win out in the end.
I know some of you don't like the Daily Mail, at least this paper has raised a valid issue that has been ignored for too long.
http://www.dailymail.co.uk/news/article ... otice.html" onclick="window.open(this.href);return false;

[wacko74]

Yes shares are steadily rising again... let's see how long it takes for our top brass to issue another prophecy of doom and gloom in order to send them crashing back down again (just like they do every time the share price starts to head upwards)