Royal Mail remains top dog as new share sell-off looms

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Competitors have wilted as market leader flexes muscles - and Royal Mail shares have climbed


Aggressive competition in the UK mail and parcels market looks like it is starting to ease, paving the way for improved financial performance at market leader Royal Mail, writes William Cain of Shares magazine.

Osborne reveals new Royal Mail shares offer

A de jure monopoly for 350 years, the UK mail industry was opened up to full competition in 2006. Nimble competitors Yodel, Hermes, UK Mail and Whistl now vie toe-to-toe with Royal Mail on its traditional mail patch – as well as in the parcels market – but without the legacy cost base. Yet reports of the death of the red post box are greatly exaggerated.


City Link's high profile collapse over Christmas 2014 and recent cut-backs to services at mail and parcels rival Whistl have boosted Royal Mail's share price, which, before George Osborne's announcement that the government would sell its remaining stake in the company, was trading at its highest level since May 2014.

Having joined the stock market at 330p in October 2013's IPO (initial public offering), shareholders who bought Royal Mail shares at flotation now sit on a handsome profit.

There are other catalysts on the horizon too: tough prior year earnings comparisons are falling out, margins are increasing and value is being unlocked from the balance sheet.

Comparisons for revenue and profit were tough as the business exited public ownership. Stamp prices were increased dramatically in the years running up to Royal Mail's privatisation, with a 14p hike in 2012 to 60p for a first class letter and 50p for second class mail.

If margins can be brought up to industry averages, Royal Mail can increase operating margins around 300 basis points from its current 4.6 per cent. Every 100 basis points of margin expansion is worth an additional £100 million in pre-tax profit, calculates Berenberg analyst Matthew O'Keeffe.

The balance sheet is another strength. Royal Mail unlocked around £111 million of cash from surplus assets in London at the end of 2014. O'Keeffe reckons other London properties could be worth as much as £1 billion, close to a quarter of the business's market capitalisation.

'We believe that the eventual transformation of Royal Mail (in both operational and financial terms) is likely to release tremendous value that is only modestly reflected in current estimates or valuations,' writes O'Keeffe.

A key challenge for the business is managing the decline in its mail division, where volumes are forecast to drop between 4 per cent and 5 per cent in the period to 2023. Delivering growth in structurally challenged markets is not without precedent, as investors in tobacco and some of the better quality media companies can attest. Royal Mail's market leadership and its exposure to the growing parcels market mean it is well placed to deliver.


Royal Mail shares drop as Osborne reveals new sell-off

4 June

Shares in the Royal Mail fell today after the government announced plans to sell off its remaining 30 per cent stake in the company.

Chancellor George Osborne revealed that the shares, currently worth £1.5bn, would be sold at some point this year to help pay off the UK deficit.

"It is the right thing to do for the Royal Mail, the businesses and families who depend on it – and crucially for the taxpayer," he told the House of Commons during a debate about the Queen's Speech. Shares in the Royal Mail subsequently fell almost 2.3 per cent to 515p in lunchtime trading, reports City AM.

Osborne assured his fellow MPs that the new Tory government "will only sell our stake when we can be sure we are getting value for money".

Nevertheless, the sell-off is likely to "prove hugely controversial", says the Daily Telegraph.

It comes just over a year and a half after the company was listed in a historic privatisation in October 2013. The share price leapt by 38 per cent from its initial price of 330p on the first day of trading and later peaked at 615p, prompting anger from opposition MPs.

The Treasury is yet to make a decision on whether its shares will be sold privately to investors or to the public.

The move comes as part of Osborne's efforts to shave £4.5bn off the UK's debts, with government departments expected to find a further £3bn of savings this financial year. The NHS, education and foreign aid have been ring-fenced from the cuts, which will be detailed in the Chancellor's new Budget on 8 July.