Its been nearly four years since Royal Mail
was privatised. Whatever the merits of the
decision politically, its been a poor investment,
unless you were among the many small
investors who flipped your shares early in
the process. If youd invested at the peak in
early 2014, when the share price stood at more
than 600p, you would have ended up losing
nearly 40% of your money. The price has
fallen to 376p, below the price at which it first
listed. It recently suffered the shame of being
demoted from the FTSE 100, which may force
several funds to sell their holdings in it.
There are plenty of reasons for investors to
be concerned. A dispute over changes to the
pension scheme mean there is a strong chance
that the company will face industrial action,
which would hit revenues and reliability. In
the longer term, it faces competition from
Amazon, which has shifted from being a major
customer to a competitor, investing large sums
of money in its own distribution network.
And in the longer run, drone delivery and 3D
printing could make the whole idea of human
beings delivering parcels an anachronism.
However, the fact remains that the company
is making substantial strides in dealing with
these changes. It has worked hard to cut
delivery deals with retailers, including signing
agreements with Marks & Spencer, and John
Lewis. These contracts have enabled it to
benefit from the rise in parcel volumes as retail
sales continues to shift away from bricks and
mortar towards online commerce. Royal Mails
GLS subsidiary also helps it to benefit from
growth in e-commerce in continental Europe.
There are also signs that its recent investment
in information technology is helping it to
streamline costs, making it more competitive
with its rivals.
Even if Royal Mail proves unable to turn the
core business around, it is sitting on a lot of
valuable real estate, much of it in London. It
has already sold some of its surplus property
to reduce its debt, but it is still trading at a
discount of around 10% to the value of its
tangible assets. And if you include intangible
assets, this widens to 25%. It also looks cheap
compared to earnings it trades on a price/
earnings ratio of around 9.6. Its ability to
generate lots of cash means that even if the
worst comes to the worst, it should be able to
keep paying the generous dividend of 5.8%.
At these levels, the bad news seems priced in.
So Id suggest going long on Royal Mail at
377p. IG Index requires a minimum stake of
£1 per 1p. Id suggest increasing this to £2.50
per 1p, and putting on a stop-loss at 177p,
limiting your total downside to £500.
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