Royal Mail IPO

Royal Mail will become a fully listed plc and available to trade in full on the markets on 16 October 2013.  The government is selling up to 62% of the business where 10% will go to Royal Mail employees as part of a share plan and the rest will be available to private and public investors.  Investors have until 8 October 2013 to apply for the shares in the IPO with the offer price in the range or 260p and 330p. The IPO has attracted quite a bit of demand since its announcement.  Latest news from Reuters suggests that as much as 60% of the offer price will now be towards the upper end of the original range, valuing the company up to £3.3bn.

So what’s our view?

Royal Mail has only recently become profitable again.  The five years prior to 2011 were not so great and around 50,000 employees were made redundant.  The key point for us is understanding whether the current management team will be strong enough to push the business forward as they need to ensure that Royal Mail remains a sustainable business.  The current balance sheet is completely unleveraged which provides them with a great starting point.  In addition, the privatisation of other similar businesses have proved to be profitable.  The Telegraph makes reference to Deutsche Post as an encouraging example where the German post office group, which floated in 2000 and has gone from strength to strength.

We have listed some of our views regarding the positives and negatives below.

Positives

  • The business has an unleveraged balance sheet
  • The offer is made up of existing shares sold by the Government
  • The sales of some sites could be as much as £500m and it has been recently clarified by some fund managers that the proceeds would not be diverted to the pension fund, so this would free up cash for shareholders
  • We would expect a business model to reflect that of a typical utility company where regular dividends are paid.  This could make the shares attractive for income seekers
  • The logistics and parcel delivery side of the business is increasing in value

Negatives

  • Postal work and letters are slowly becoming more redundant and there has been a large decline in the amount of letters being delivered by royal mail due to electronic forms of communication
  • The sale has been criticised by the labour party and they could make things difficult for Royal Mail as they are not enterprise friendly.  They have already mentioned that they feel privatisation undervalues this business and unions have balloted for strike action
  • The management team may not be strong enough to push the business forward
  • As with any business the Royal mail is regulated which makes it difficult for the business to increase profit margins significantly
  • Royal Mail will face increased competition against other logistics and parcel delivery companies which is important as this side of the business is expected to be the largest contributor to Royal Mails profits going forward

To summarise, we think that if the Royal mail’s management team are strong enough to push the business forward and adapt to the ever changing environment the shares could be attractive.  However, regulation has made profit margins difficult to achieve.  But if lighter regulation can allow profit margins to rise to 5-10% the shares to us look like good value.

If you have any queries at all, please do not hesitate to contact us otherwise have a great week!