Stock of the day 16/11/2015 – Royal Mail PLC

Will Royal Mail investors want to open their post on Thursday when the company announces its half year results?

It’s been a proverbial rollercoaster of a year for Royal Mail; after gradually rising from a 2015 opening price of £4.30 to £4.44 by April, the company then received a steroid injection by the end of that month following the collapse of PostNL’s UK Whilstl operation. Combine glee at its rival’s demise with the Tory election victory and a solid set of full year results and by the end of May the company had risen to a year high of £5.32.

George Osborne’s announcement that the government was ready to sell-off its final 30% stake in the company then set the stock back at the start of June, but Royal Mail did manage to remain above £5 until the end of July. That was to all change, however. First up was a July 21st trading update which saw flat group revenue and a 3% increase in UK parcel volume countered by a 5% drop in letters delivered, leading that division’s revenue to fall by 4%.


(Source: IT-Finance.com 16/11/2015)

There was more bad news for Royal Mail a week later; on July 28th Ofcom issued a ‘Statement of Objections’ to the company, claiming it had ‘breached competition law by engaging in conduct that amounted to unlawful discrimination against postal operators competing with Royal Mail in delivery.’ This lopped another 3.5% off of the stock’s price, pushing it below the £5 level it has been unable to reach since then.

Heavily hit across August the company underwent a brief rebound in September and the start of October that left it tickling £4.70. However, the mid-October sale of the UK government’s final 13% stake in the company saw Royal Mail both become fully privatised for the first time in its 500 year history AND resume its fall, culminating in a current trading price of £4.39 (IT-Finance.com, 16/11/2015).

As with its July update the main focus on Thursday will likely be on letters; frustratingly for Royal Mail, analysts are expecting a 5% drop in delivery volume alongside a 3.7% fall in the division’s revenue. Those figures should be joined by flat group revenue of £4.4 billion, a 12% fall in pre-tax profits to £251 million and a 7% fall in operating profits to £322 million.

Of course Royal Mail still has its vital Christmas period to come; not that the holiday season is likely to provide any respite for the company. With Amazon continuing to squeeze the company’s parcel arm, it will take a significant rise in deliveries (more than the 4% seen last year, a figure CEO Moya Greene deemed insufficient) to seen a turnaround in the UK institution and help it avoid furthering the 5500 in job cuts it has seen in the past 12 months. And the bitter cherry on top? There is still the looming issue of Ofcom introducing pricing caps next year.

Royal Mail PLC has a consensus rating of ‘Hold’ alongside an average target price of £5.04.