Background
Royal Mail (LSE: RMG) shares first came to market in the middle of October. Since IPO at 330p, the shares have traded as high as 585p. Investors that bought at IPO have been well rewarded — too well, according to some.
Shareholders should not allow this kind of noise to distract from the real question: how profitable will Royal Mail be in the long term? We only have to wait until Wednesday for a steer on this when the company announces its half-year results.
What to expect
According to the consensus of broker forecasts, Royal Mail is expected to report earnings per share (EPS) of 45p for the full year ending on 31st March 2014. Total dividends for the year are forecast to come in at 20p.
The Christmas delivery schedule has a large effect on Royal Mail’s annual sales figure. Provided Royal Mail gets it right operationally, we should expect a large skew in profits between the first and second halves of its financial year.
This means that H1 EPS will likely be significantly less than half the 45p forecast for the year as a whole.
Investors may also get a surprise if they are expecting Royal Mail to announce an interim dividend. In the pre-IPO prospectus, Royal Mail bosses announced that they plan to forego an interim dividend, instead declaring a total payout of £133m with finals.
What to look out for
Yesterday, competitor UK Mail reported a 21% increase in parcel revenues along with broadly unchanged standard mail sales. The company also boasted an increase in market share and a 63% increase in operating profits.
Investors will want to see that Royal Mail is competing and that workforce issues are not damaging profitability. With the continuing growth in online shopping, I expect that the figures from Royal Mail’s parcel business will be key.
With the shares priced today at 12.2 times forecast earnings for the year, Royal Mail will have to demonstrate that it is positioned for earnings growth to justify its current share price.
Separate to the company’s earnings announcement, we may soon get more news on what the government plans to do with its remaining 30% stake in the company.
