Royal Mail: Buy, hold or sell

Whether it's a missing letter, late post, or a lost parcel, everyone has an opinion on Royal Mail. Since October last year, the financial community has, too. So we've pulled together the views of some of the City's most-respected fund managers and analysts to give investors a real feel for sentiment around Royal Mail shares in the Square Mile.

Here's what they have to say:

Neil Woodford, CF Woodford Equity Income fund

Since its IPO last year, the shares initially performed very strongly but have since come back to more attractive territory. This is fundamentally a very attractive, cash generative business. It has its challenges, not least the competitive threat in profitable, densely populated areas. But it has its opportunities too, such as slowly working to bring its cost base into line with its competitors. Royal Mail has an operating margin of 4.6% compared to 8-10% for most of its peers. We have been impressed by the management team and believe it is well-placed to capitalise on the long-term opportunity to deliver a better service to its customers and generate sustainable shareholder value.

Shore Capital

The immediate outlook for Royal Mail is certainly challenging, in our view, but the positives should also not be ignored and a longer-term view towards the horizon taken. Even in the short term there are some potential positives: Christmas in a reviving UK economy, with online sales continuing to grow, is likely to be robust. The UK General Election in May 2015 is likely to see a temporary step up in associated mail volumes.

Looking at cash flow valuation, the current share price appears well supported at a discount to a full DCF (discounted cash flow) valuation set at c600p (utilising a discount rate of 9%). Looking to the long-term potential from the business and the asset base, we retain a 'buy' stance.

UBS

Royal Mail faces a number of challenges, including modernising its network, managing the decline in letter mail volumes, the threat from competition in both letter and parcel, as well as dealing with a highly fixed cost base. We believe Royal Mail faces particular issues with having a highly unionised, relatively well paid workforce at a time when its revenue visibility is low and when both the letter and parcel markets are undergoing significant change. Having said all this we believe the poor share price performance and valuation largely reflect the fact these negatives are known by the market.

Investec Securities

The easy call has been to avoid the stock. However, has it fallen far enough and could a prospective dividend yield close to 5% provide some support? There is still much to worry about…but cash is still healthy and the multiples are increasingly attractive. For now, we remain at 'hold'.

JP Morgan Cazenove

Despite our reduced EBIT (earnings before interest and taxes) and price target (-7% to 695p), we continue to see long-term value as the market continues to discount long-term direct delivery losses plus an apparent c.300-400bp of parcel revenue growth downside.

Espirito Santo

The three critical aspects for the stock are: 1.) Whether Royal Mail can profitably recover share in the parcel business against increasingly technology-driven and time-specific competing offerings in the B2C e-tailing market; 2.) How Ofcom rules on access pricing and end to end (E2E) competition; and 3.) When Royal Mail chooses to automate parcels, which we estimate should deliver net savings of up to £450 million. Given the low multiples and our confidence that substantial efficiencies can be delivered, we maintain our Neutral recommendation but warn that near-term news flow is likely to be underwhelming for parcels and we do not expect Ofcom to offer assistance quite yet.

Deutsche Bank

We think that transformation is complex and will take years to complete. Whilst Royal Mail generates decent cash flow, shareholders will not benefit as cash is required for on-going modernisation. Given regulatory uncertainty, particularly around direct delivery competition from TNT Post UK and pressures on UK parcel profitability, we rate the stock a 'hold' with a 400p target price (from 486p).

Barclays

The stock trades at a discount to our unchanged SOTP-based target price of 515p, which we believe is justified given uncertainties on i) Ofcom ruling on access charges and direct delivery competition on the domestic market and ii) pending French competition investigation on GLS France. Our rating therefore remains Equal Weight.

Panmure Gordon

UK parcel revenue in first quarter suffered from increased competition and a stronger sterling, but this should be offset by a good performance in letters and better than expected cost performance. The dividend yield…remains attractive at 4.5% and should continue to provide support to the share price. We retain our 'hold' recommendation and 485p target price.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.