Royal Mail, one year on and suddenly the politicians are quiet
01:00, 09 oktober 2014
· Av CMC Markets
In July this year the Business Secretary Vince Cable finally succumbed to political pressure to review the way governments conduct stock market flotation's of public assets, as an inevitable consequence of the political controversy over how Royal Mail was valued prior to the launch of the IPO last October.
The sharp rally in the share price in the wake of the IPO generated an awful lot of political heat for the coalition, particularly given that we saw highs of 616p earlier this year, which at the time, and even now is still a ridiculously high valuation.
The scale of the interest, particularly from small investors was welcome news to a market that had been moribund at a time when the culture of investing had been seriously damaged by the events of 2007 and 2008, as well as coming under attack from politicians from all sides of the political divide.
This interest in a major UK asset that even Margaret Thatcher baulked at selling helped propel the share price to unrealistic levels in the post IPO euphoria of the share flotation.
The subsequent rally in the share price brought all manner of career politicians, who know little of life outside the Westminster bubble, let alone financial markets, to criticise the government for selling off Royal Mail far too cheaply, and while you could argue that some of the aspects of the float where mishandled, the success of the float was always going to be the primary motivation rather than the actual valuation.
Much as I hate to defend politicians and particularly Vince Cable, he was right in saying that there was an awful lot of froth in the share price in the months after the IPO, particularly when comparing Royal Mail to a lot of its peers in the parcels space, and it was only a matter of time before shareholders who bought shares above the 500p area started to realise this.
As we’ve seen this year valuing a business at too high a valuation also has risks and can result in damaging investor enthusiasm for subsequent new issues. This year we’ve seen a number of IPO’s pitch their valuations way too high, inviting accusations of greedy management and bankers looking to rip off prospective investors.
Now that the heat of last year’s IPO has dissipated and investors are starting to become more realistic about the company’s ability to generate revenues and profits we’ve seen Royal Mail’s share price decline steadily over the past 7 months to be trading below 400p, not that far away from last October’s launch price.
One year on away from the hyperbole of events twelve months ago and we can now look back on events with a slightly more dispassionate eye, and the fact is that Royal Mail’s share price now appears to more accurately reflect the same fundamentals that we were looking at a year ago.
Earlier this year consensus projections for 2015 and 2016 were for revenues to increase to £9.6bn for year end March 2015, and £9.7bn for 2016, with pre-tax profits expected to come in at £481m and £575m respectively.
These have now come down to £9.5bn and £9.6bn on the revenue front and to £429m and £501m on the pre-tax profits front, highlighting the continued readjustment of investor expectations with respect to the competition challenges facing the industry, and Royal Mail in particular, which is still required to deliver to areas in the UK that most private companies would deem unprofitable.
Given that Royal Mail is competing with companies like TNT, UPS and UK Mail, who can pick and choose the geographical areas they want to cover, its margins are likely to continue to come under pressure, hence the recent decision to trial Sunday deliveries and collections in the London area in an attempt to better compete for business as we head into the lucrative Christmas period.
The competitive nature of the industry was further highlighted by this week’s decision by Royal Mail to cut its prices for parcel deliveries over the Christmas period between the periods of October 20th to January 18th.
This pressure on margins is likely to be a key drag on the share price, particularly at a time when management are looking to grow the dividend from its current 3.4%, to 5.4% in 2015 and 5.7% in 2016.
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