Some sketchy information on the prospective flotation of Royal Mail has been released. You can obtain it here: www.gov.uk/royalmailshares and register your interest. Note that you don’t have to do so via a stockbroker but can purchase the shares directly, which may be preferable.
Here are some initial comments and what to look out for when you read the prospectus in due course (which all investors should do before investing):
First it’s worth pointing out that they are privatising Royal Mail and Parcelforce, not the Post Office which is a separate organisation.
The minimum application for members of the public will be £750 and there will be preference given to Royal Mail employees (who will get free shares).
The business had revenue of £9.3bn in 2013, which was up 5 per cent “on a like-for-like basis”. Operating profit was £403m. But it is no secret that the letter business is declining while the parcel business is growing (up 13% last year) driven by internet shopping.
Letter volumes are in long-term decline due to the use of email and the rising postal charges (which have been ramped up rapidly in recent years to make the business profitable no doubt and ready for sale). How much of the revenue increase last year was simply down to price increases on letters is not clear. Also those rapid price increases may not yet be fully reflected in letter volumes, as there is always a certain “drag” before customers learn to adapt to substantial price changes.
The announcement talks about “margin expansion” underpinning strong cash flow – surely they mean putting the sale prices up while controlling costs, but whether that can be continued will be one question to examine. The business may simply have been “restructured” to achieve short term profits to enable it to be sold.
It has been suggested that the market capitalisation of the company will be about £3bn based on pre-tax profits last year of £403m, which would suggest a p/e ratio of perhaps 9 (based on a rough estimate of post tax earnings of £320m), with a yield of 6%. So it could be quite cheap in essence and comparable with other price-regulated quasi national monopolies – but of course this is not really a monopoly and certainly not in the parcel sector.
As with other national regulated utilities, the details of the regulatory scheme, and whether they will be able to earn a decent return on capital is one thing to look at very closely. Private investors should definitely not be buying these shares simply because they like their local postmen and their service!
One concern is that the Government says it is only selling a “majority of the existing shares”. It won’t apparently be retaining any “golden share” but it may still have a substantial stake and hence much influence over the company. This needs to be examined carefully, and it’s usually a bad idea to have any single shareholder with a big stake, particularly one with non-commercial interests such as the Government.
Not including the Post Office in the sale means that the business will have little control over one of its largest sales channels – not an ideal situation.
Employee unrest is another risk, and the Postal Union have already called for a national strike to oppose the plans with the poll soon to be declared. However as they have linked it to pay demands, it seems this may be more about using their bargaining position at an opportune moment to extract more from the business.
So it’s not necessarily as simple as you might think to evaluate this business. But many past privatisations were of businesses that looked quite sickly with doubtful prospects. Some remained so, but others were stimulated by the new commercial freedoms to change their companies into growing and profitable businesses. It may simply be too early to tell, even after you have read the prospectus, whether that will be true in this case. At least the current CEO, Moya Greene, has said she is determined to deliver a “revitalised company”.
Roger Lawson
