Royal Mail: postman stats

[TrueBlueTerrier]

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First-half earnings paint nuanced picture of the British postal operator

Reality checks are always useful. So amid the political furore over the stock market flotation price for Royal Mail, first-half results on Tuesday were very welcome. Like last week’s report from the group’s regulator, Ofcom, these painted a more nuanced picture of the British postal operator than the stock market’s bulls are endorsing.

For a start, the numbers were a reminder that, at heart, Royal Mail is a slow-growth business, vulnerable to competition. Revenues in the six months to end-September were 2 per cent higher (year-on-year) and up 1 per cent in the main UK parcel and letter delivery business. The fade in letter sales was not too bad, down 4 per cent. But while the overall 9 per cent improvement on the parcels side looked attractive, it owed much to price increases and came on flat volumes as e-retailing demand slowed in the summer. Royal Mail warns that a similar pattern may be evident in nine-month numbers because some business shifted to competitors due to fears of industrial unrest and strike action.

Conversely, though, costs were well-contained – flat before charges to overhaul the business, which themselves fell 40 per cent. So, with that benefit and a one-off VAT credit the underlying operating margin rose to over 5 per cent, compared with 3.3 per cent a year ago. GLS, the higher-margin international express unit, also did well. Hopes are rising, too, that a labour deal is in sight.

Where, then, does this leave the valuation? At 565p, Royal Mail shares trade on 16 times forward earnings – rich compared to postal peers and in line with Deutsche Post, with its larger DHL express business. Even allowing for potential asset sales, and putting GLS on an express player multiple, Barclays gets to a “base case” fair value of 500p. True, operating profit is sensitive to small changes in UK revenues. Even so, current price levels look Panglossian.

[fishtank]

Panglossian

I had to google that teebs.

[clashcityrocker]

Panglossian

I had to google that teebs.

Really?
Voltaire - Candide.
You had to Google that?

[fishtank]

Panglossian

I had to google that teebs.

Really?
Voltaire - Candide.
You had to Google that?

Yes,I must have been off sick during the WTL session on French philosophers.

[clashcityrocker]

Yes,I must have been off sick during the WTL session on French philosophers.

RMTV catch up on demand is your friend.