Royal Mail [RMG.L] has had a tumultuous 2020. The coronavirus outbreak has seen staff walkouts, a scrapped dividend and rising costs. What does this mean for Royal Mail’s share price? Given that it comes on top of an already declining letter business and problems implementing a transformation plan, there could be a difficult period ahead.
Despite the turmoil, Royal Mail's share price has rocketed recently following CEO Rico Back's departure. His withdrawal could give Royal Mail the chance to repair its frayed relationship with its workforce. There are also rumours that Royal Mail could be split – potentially delivering a first-class return for shareholders.
But is this enough to justify Royal Mail's share price? Or will full-year results bring unwelcome news for investors?
When is Royal Mail announcing full-year results?
What's happening with Royal Mail's share price?
Since hitting its lowest point this year at the start of April, Royal Mail's share price is up 50% following restructuring rumours. That said, Credit Suisse has warned that the market is being too optimistic about how much value splitting up Royal Mail can add.
Analysts at the Swiss bank have suggested that a few things need to happen in order to justify Royal Mail's share price as it stands at the moment, according to Proactive Investors’ Oliver Haill. These include: a potential buyer paying over the odds for Royal Mail’s overseas parcel business, GLS; the UK Parcels, International and Letters (UKPIL) business profiting €500m in 2024; and parcel deliveries growing sufficiently to offset a 1% decline in letters.
How could the full-year results affect Royal Mail’s share price?
In its coronavirus update in early May, UKPIL revenue was down £22 million year-on-year. In total there were 308 million fewer addressed letters delivered, with revenues down 23%. That said, parcel volume was up 31%, with revenue in this area up 20%. It seems the company’s full-year results have the potential to bolster Royal Mail’s share price, but they could also confirm analysts’ fears that the stock is currently overvalued.
Although the coronavirus outbreak has seen a further increase in demand for parcel delivery, it has also meant UKPIL’s costs have grown by £40 million to cope with increased absences, social distancing measures and providing PPE. Royal Mail has also set aside £25 million to deservedly award frontline staff who have been working during the outbreak.
Amount set aside by UKPIL to cope with absences due to coronavirus
Credit Suisse believes that letter revenue will come in worse than expected in full-year results, which would be a negative catalyst for Royal Mail's share price. Of course, if revenue continues to fall and costs continue to rise, then we can expect the share price to be volatile following the publication of results.
Next financial year doesn't look much better for Royal Mail’s share price. Credit Suisse believes that marketing mail revenue will take a 20% hit in the first six months of 2021. Over the full year, analysts forecast marketing mail to fall 14%. This would see a £58 million dent in Royal Mail’s revenue and profit. GLS's profit margins are forecast to fall to 3.6% in 2021, with revenue down 5.1%. Any suggestion that things aren’t quite so bleak will go a long way in reassuring shareholders.
So, why hang on to Royal Mail's stock?
One reason not to dump Royal Mail shares, at least according to Deutsche Bank, is the prospect of a possible takeover. The bank noted that Vesa Equity Investment had increased its stake in the postal operator to 5.35%, or around £85 million.
As a result Deutsche Bank upped its share price target to 183p from 93p, upgrading the stock from Sell to Hold. Despite this, analysts at Deutsche are not suggesting Royal Mail is out of the woods by any means:
“Our fundamental view on Royal Mail is that it is overvalued on a stand-alone basis and that the shares are fundamentally worth 93p, far below the current share price,” said Deutsche Bank analyst Andy Chu.
“Our fundamental view on Royal Mail is that it is overvalued on a stand-alone basis and that the shares are fundamentally worth 93p, far below the current share price” - Deutsche Bank analyst Andy Chu
What do the analysts think?
Royal Mail does have some fans amongst analysts. Citigroup raised their share price target to 210p from 150p. The bank noted an increase in parcels being sent during lockdown as a reason for optimism, upgrading its rating to Buy from Sell.
Investment houses are generally less enthusiastic. In May, BlackRock upped its short position in Royal Mail to 2.8% after Rico Back's departure. Following BlackRock were Investment managers Pictet and Egerton Capital.
Credit Suisse cut their share price target on Royal Mail from 138p to 107p. Hitting this would see a 42.5% downside on the current share price (through 23 June’s close). Of the 14 analysts tracking the stock on the Financial Times, the majority rate it either Underperform or Sell. An average 148p 12-month price target would see a 20.5% downside on the current price at 23 June’s close.
|PE ratio (TTM)||5.68|
|Quarterly Revenue Growth (YoY)||5.10%|
Royal Mail share price vitals, Yahoo Finance, 24 June 2020
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