Royal Mail share surge invites criticism
A lot of column inches have been given over to whether the recent Royal Mail IPO was undervalued when it was floated a few days ago.
Certainly the early price action seen in early deals would appear to suggest that it was, as evidenced by a share price surge to within a whisker of 500p in the first five days of trading.
But the surge in the share price doesn’t necessarily mean that an IPO is mispriced.
The City struggles to value new listings just as much as the underwriters at times, as was the case with Facebook when the listing was very well subscribed as well, only for the stock to flop badly in the months that followed.
While there may well be a case for arguing that the IPO was under-priced, over pricing it would have invited equally strident criticism.
We saw last year in the case of Facebook the folly of overpricing an eagerly awaited IPO, and then seeing the share price halve in a matter of months, with small investors getting badly burned in the process.
That would have been an even bigger own goal, and more important than that would have deterred small shareholders from becoming involved in subsequent share issues which could come to market in the coming months and years.
Let's not forget that the small investor used to be a key part of the UK stock market prior to the crash in 2008. For the last five years he/she has had to endure the bailout of two highly valued institutions in the shape of RBS and Lloyds and see the share price of a third, Barclays get absolutely clobbered to lows of 47p at one point.
It’s also important to remember that with any IPO there can be a lot of euphoria and froth for want of a better word in the first early trades. This is likely to have been exacerbated in the run-up to the launch with a number of politicians and commentators saying that the shares were undervalued.
There can be no better way to start a bandwagon going and have people start jumping on it than have politicians claiming that the government is under-pricing it.
There is no doubt we have seen an enormous amount of interest in early trading with a lot of small investors cashing in their 227 shares for a net profit of around £350. A tidy little sum to spend before Christmas by any measure I would suggest.
The fact is that once the shares have settled down after a few weeks we will be able to get a much better indication as to the long term value of the shares.
At this early stage the share price does seem somewhat overstretched, as early interest remains high, particularly with a projected dividend yield at current prices of around 4%.
This could equally apply to a number of stocks in this low interest rate environment where central bank money has pumped up the valuations of a number of stocks of good quality and not so good quality. Ocado is a case in point, a company that has yet to make a profit, which is currently valued at a rather lofty £2.7bn.
The fact is Royal Mail operates in a space where competition is fierce and its parcels division will be at the core of its future success. It is very difficult to make a case for its letters division which is likely to have to cope with a continued decline in the amount of letters sent in an era of increased electronic communication.
The company's future success is likely to hinge on the readiness of its biggest asset, its employees, to accept and adapt to the new reality of private ownership.
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