Stock Brief - Royal Mail (LON:RMG)

9th Nov '21 by Keelan Cooper

14 comments 4939 reads

As one of the most consistently high-ranked shares on Stockopedia, the Royal Mail turned out to be one of the top performers after the onset of the Covid-19 pandemic. As parcel demand boomed from people stuck at home, so did the company’s share price, which more than quadrupled from the March 2020 lows to the June 2021 highs.

FY2021 was an exceptional year for the company, and generating £620 million in net profits blew away even the company’s own internal expectations. However, the Royal Mail’s share price has taken a breather after the company cited cost pressures in a number of markets. The share price has drifted lower as a result and is currently almost 30% below its 52 week high.

Despite the increase in costs, the company has still guided for a strong H2, with revenue and profit figures expected to be higher than H1 (operating profit estimated at £395 to £400 million in H1).

In an industry facing ever-evolving structural changes, as letter volumes decline and parcel volumes soar, will the Royal Mail continue to deliver?

Profile

What are the company's principal business activities, how does it generate its revenues?

The company’s business activities are split in two: Royal Mail and General Logistics Systems (GLS). Through the Royal Mail, the company collects, sorts and delivers letters and parcels to over 31 million addresses across the UK. It is also the UK’s sole designated Universal Service Provider.

Delivering over 840 million parcels last year, GLS is one of the largest ground-based deferred parcel operators in Europe. Covering over 40 countries, GLS has rapidly expanded its global presence in recent years, particularly in North America.

The Royal Mail accounted for 68% of group revenues last year, with GLS making up the remaining 32%.

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Parcels now represent 72% of group revenue, which was up from 63% in the prior year. This has helped to offset the decline in Royal Mail letter revenues.

Size, Sector & Exchange

At the current share price of 430p, the Royal Mail is worth just over £4.3 billion, giving it large cap status. The company operates in the Industrials sector, as part of the Freight & Logistics Services industry group. The Royal Mail is currently a constituent of the FTSE 100.

Business strategy

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JohnEustace

9th Nov '21

JP Morgan set a price target of 804p last week. I hold.

Brucie5

And your conclusion is..?

I understand there's a countervalent risk case, but how might you express that for example on the basis of 60/40.

Bought in after recent pronounced retrace, and was interested to see JP Morgan very recently set a tp of c. £8 on basis of doubling the PE. Your analysis of the automation issue and outlining of the Canadian expansion story is therefore very helpful in setting out the context.

Look more good than bad to me, particularly if it can make itself to attractive to growth with income seekers.

davidallen77

possible exit from fste100 in December?!

Bouden54

I think Royal Mail (LON:RMG) looks very good value at these levels. GLS by itself probably almost justifies then current market cap, and there has to be a decent likelihood that this will be sold off.

Parcels are clearly a structural growth area, and in the UK they have a strong market position as result of their infrastructure and brand.

The share price has dropped quite a bit recently, mainly due to concerns over rising costs, especially labour. But ultimately I think they should be well placed and able to pass these on through higher parcel prices. If we do see an ongoing shortage of labour, their lower cost peers (Amazon, Hermes, etc) will probably find it more difficult to get hold of staff - the majority of RM staff are on permanent (and fairly generous) contracts, so retention should be better than average.

There is also potentially a lot of low hanging fruit which could lead to quite significant productivity gains - I'm thinking mainly of the moves towards greater automation as the new distribution centres are rolled out.

skyvan

"Deferred parcel operator"? English translation please.

Deferred parcels can be put aside to wait for more deferred parcels to arrive until a large delivery vehicle can be filled.

rmillaree

12th Nov '21

Must admit i have had a punt here and it aint going to well as i bought before recent spike down on somewhat dubious broker note (other brokers seem to be much more positive but the market only reacted to the negative note)

When i say punt - i have low conviction that my investemnt here will be a wise one - that probably says everything that needs to be said about my punt type trades - probably best to do the opposite of me :)

djones08

Royal Mail is worth at least £6bln ent value in this market with the primary tailwind being parcel delivery. A nice 25% gain if you are looking to spread portfolio risk. There are better stocks out there though.

Silver Moon

This could encourage unwary buyers while institutions off-load. i do hold, and hold, and hope for the best.

Silver

Rusty2

Rm (LON:RM.) looks good value however the competition is increasing and is better. They lost the monopoly with the post office, back in August: https://tamebay.com/2021/08/po...

How will that affect them?

I have parcels delivered by DPD and RM. DPD are a lot more efficient and their tracking system works well, unlike RM's which is useless. DPD has invested a lot in technology.

I had to return an item to Paris because it was faulty, they agreed to pay, I would have sent via DPD but they insisted on RM, cost was £25, DPD was £14. Tracking was completely useless but it did turn after about 1 week.

Major problems in Chelmsford area with deliveries, was on the news the other day, people are not getting post for weeks or just once a week.

Wimbledonsprinter

The decision not to replace the group CEO, when Rico Back left, I think backs up your point that GLS and Royal Mail could well be separated. There is only a Group Chair and a group Finance Director. I think they will probably want to see a year or so of “post-pandemic” trading to just verify that each business can stand alone financially. I see such a potential break-up as the main medium-term catalyst.

Stonethecrows

13th Nov '21

I love in Sweden abandons have had 2 private parcels sento me in the last year via Royal Mail normal post and none of the, have ever arrived. One made it back to the sender 4 months later. Maybe a brexit problem but not a good green flag for me, though I’m having a punt as a spread bet for the next results.

Shark trader

18th Nov '21

good writeup and analysis. i bought back in again on the good interims and technicals which show price is sticking above EMA on 8, 21 day time frames

JSLDUK

Great results today, I have been a holder of RMG for 3 years. They look like they have been a net winner since pandemic and still look cheap. Div back, strong balance sheet, low debt, growing profit, look to have for now resolved Union disputes and in a growth sector. Main downsides will there be future union disputes (probably) will there be margin pressure as labour costs increase (probably) but still feel there more upside than down, currently.

Stock Brief - Royal Mail (LON:RMG)

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Keelan Cooper

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