Should investors be snapping up shares in Royal Mail?

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FE Trustnet looks at the pros and cons of investing in the largest privatisation since the Thatcher era.

Investors have just a week left if they want to participate in the initial public offering (IPO) of Royal Mail shares, with the window for subscriptions closing next Tuesday.

The share price will be between 260p and 330p, with investors needing to commit at least £750 and accept the price that is determined within that range.

Analysts suggest that the price is expected to surge in the short-term, but opinion is split on the longer-term case for holding the stock.
AFH Wealth Management’s Graham Toone (pictured right) suggests the price will get a kick at the start, with the Government keen to see it rise on flotation.

ALT_TAG The current price range puts the stock on a price/earnings [P/E] ratio of 6.5 to 8.3 times, well under the 14.5 times earnings of the FTSE All Share.

Deutsche Post, the privatised German postal operator, is on a P/E of 17.1, while UK Mail Group, a specialist parcel company, trades on 23.53 times earnings.

The market may decide it deserves a lower rating, of course, as it is a more defensive stock, but there is room for an initial share price rise.

The dividend yield on the flotation price looks particularly appealing, coming in at 6.1 per cent to 7.7 per cent, depending on the eventual IPO price.

Of course the yield is dependent on the price, and if the share price soars the yield will fall for anyone buying the shares at a later date.

With the high level of demand for blue chip equity income stocks, the yield certainly seems to be an enticing carrot dangled by the Government, and the shares are already over-subscribed.

This means that investors could miss out on some or all of the shares they ask for even at this date, although they will be traded from next Tuesday for those who are late.

Gavin Oldham (pictured left), chief executive at The Share Centre, says the prospects for the company look quite good as the rise in online shopping boosts its parcel business.

ALT_TAG "This is a major opportunity to buy shares in one of Britain’s best known companies, a highly respected part of everyday life," he said.

"What is less well-known is the transformation of the Royal Mail’s prospects through its parcel-delivery service, responding to the surge in online shopping."

"Doorstep deliveries for goods purchased on the internet, efficient operations and competitive pricing should provide investors with a lower- to medium-risk investment with the potential of good dividends."

Richard Hunter, head of equities at Hargreaves Lansdown, says that this is certainly a plus and highlights that the company has undergone a transformation programme since 2008, aimed at streamlining the parcel business and carrying more packages on the core network.

The prospectus for the offering shows that operating profit margins have been improving over the past three years, from 1.7 per cent in 2012 to 4.4 per cent in 2013. They are projected to come in at 5 per cent in the first quarter of 2014.

The company’s GLS division, its parcel business in Europe, has consistently higher margins, with the figures at 8.2 per cent, 6.7 per cent and 7.7 per cent, respectively.

However, Hunter highlights a number of negatives. Letter volumes are continuing to decline, while the parcels business is extremely competitive.