Royal Mail’s [RMG.L] share price has failed to deliver for most of this year. In April, the coronavirus crisis brought it down to 124.30p. In August, Royal Mail shares were the fifth most shorted on the LSE.
However, in the first couple of weeks of September, the tide turned for Royal Mail’s share price.
In four heady days, Royal Mail’s share price leapt by around 35% to 233.70p — a 25% rise made 8 September a red-letter day. This caught out many short-sellers and renewed confidence in the beleaguered stock.
Many investors will be wondering whether Royal Mail’s share price recovery is sustainable, however — especially in the COVID-19-impacted world in which it now operates.
The future of the postal service
The past couple of years have been the most challenging in the Royal Mail’s 500-year history. With texts and emails long since replacing physical letters, the rise in online shopping has forced the company to reinvent itself as a parcel delivery service.
Royal Mail’s share price then faced a raft of problems throughout a summer of COVID-19.
Letter volumes fell by nearly a third, the company’s profits dropped £22m, and advertising mail dropped by 63%. Not helping matters was the fact the company had to process and deliver thousands of items in a world where people were discouraged from touching potentially contaminated surfaces.
Royal Mail’s share price has also suffered because the company locked horns with the Communication Workers Union (CWU), which accused Royal Mail of not providing its employees with sufficient personal protective equipment. It cut 2,000 jobs and, to further rock the boat, Royal Mail’s recently appointed CEO Rico Back suddenly quit in May.
The CWU dispute continues, but there are clear reasons for Royal Mail’s share price upturn. Despite the challenges, Royal Mail has boomed during lockdown. It delivered 177 million more parcels — a 34% increase — between April and August than in the same period last year, and revenue was up 33.1% year-over-year.
Number of additional parcels being delivered during lockdown - a 34% increase
On the other hand, the firm admitted in its recent report that it still expected to make a “material loss” this year and the encouraging figures had failed to halt “the long-term decline in Royal Mail profitability”. It added that it was unlikely to be profitable in the near term “without substantial business change”. Revenues declined 21% in the five months to August.
“The crisis at the postal service has not passed,” Nils Pratley wrote in The Guardian. “The weak state of the letters market is an acute problem because letters are far more valuable to Royal Mail than parcels.”
Royal Mail’s share price forecasts present an equally mixed bag – of 12 analysts surveyed by Refinitiv this week, one was a Buy, three an Outperform, three a Hold, four an Underperform and two a Sell.
The median 12-month target for Royal Mail’s share price is 174p, with a high estimate of 304p and a low of 95p, which suggests optimism is growing.
So, Royal Mail and its investors are not quite watching the last post yet. Some analysts have recommended a longer-term solution may be to break up the two arms of Royal Mail, splitting its UK parcels, international letters division away from its Europe-based parcel delivery company General Logistics Systems (GLS).
Keith Williams, Royal Mail’s interim executive chair, admitted there was value in the idea as the two brands had little in common, but added: “In the medium term, an international presence is clearly important, and the opportunity remains to create more value for shareholders."
“We believe it would be in shareholders’ best interests to split the company in two and let shareholders decide on the future of the two businesses,” says Daniel Roeska, analyst with AllianceBernstein.
“We believe it would be in shareholders’ best interests to split the company in two and let shareholders decide on the future of the two businesses” - Daniel Roeska, analyst with AllianceBernstein
“If GLS stays within the group, we see a substantial risk that cash flows from it or sale proceeds will be consumed in part by the UK Parcels and Letters transformation.
“In its current form, Royal Mail Group is worth less than the sum of its parts. Why is Royal Mail the best long-term owner of GLS?” he asked.
|PE ratio (TTM)||15.03|
|Quarterly Revenue Growth (YoY)||0.1%|
Royal Mail share price vitals, Yahoo Finance, 23 September 2020
Disclaimer Past performance is not a reliable indicator of future results.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.