Why Royal Mail PLC Has Attractive Growth Prospects

Royal Mail PLC (LON: RMG) looks set for some nice earnings growth.

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royal mailRoyal Mail (LSE: RMG) has only been a listed company since October, and though it has been recording a pre-tax profit for a couple of years now, there haven’t been any earnings per share (EPS) figures from which to make any real sense of growth.

But that’s due to change when the company reports its annual results for the year ending March 2014 — the report of those results should be with us on 22 May. Current forecasts suggest a rise in pre-tax profit of more than 50% to around £500m, with a maiden EPS figure of 34p.

Forecasts

In fact, this is what the next three year-ends are currently predicted to look like:

Dec Pre-tax EPS Change P/E Dividend Change Yield Cover
2014 £501m 34.1p n/a 17.4 16.4p n/a 2.7% 2.1x
2015 £605m 44.7p +31% 13.3 24.0p +46% 4.0% 1.9x
2016 £664m 51.4p +15% 11.6 28.1p +17% 4.7% 1.8x

The Royal Mail share price has soared 80% from a flotation price of 330p to 592p today, so those who managed to bag that minimum allocation have made a decent percentage gain.

Many have opined that the shares were sold off unrealistically cheaply, and I’d certainly agree with that, but at today’s price are the company’s growth prospects enough to make the shares a bargain?

Half-time

When Royal Mail reported first-half profits for the year to September, the prospects for rising earnings were looking good — operating profit for the period had nearly doubled to £283m, from £144m at the same stage in 2012.

But that did include the costs of what the company called its “transformation”, and when that was stripped out we saw a 34% rise in underlying operating profit from £264m to £353m — a smaller rise, but though these are early days for comparing year-on-year profits, it was still pretty reassuring.

Parcels

That came from an overall rise in revenue of 2% to £4.52bn, which the company said was “driven by strong growth in parcel revenue”. Unsurprisingly in these days of electronic communication, revenue from letters fell 5%, but parcels revenue rose by 9% and at the time accounted for 51% of overall revenue.

By the time of Royal Mail’s third-quarter update on 24 January, the picture hadn’t really changed much, with total like-for-like revenue up 2% and parcels still accounting for 51% of revenue — though year-to-date parcels revenue was up 8%, down a little from the 9% recorded at the halfway stage.

Static volumes

But there was a big note of caution that needed to be sounded. That rise in parcels revenue was entirely due to increased charges as a result of the company’s moves in its size-based pricing — parcel volumes were actually flat!

That’s not entirely a bad thing, as one of the results was a decline in “large uneconomic” consumer items being sent, leading to a greater proportion of higher-margin parcels in the mix.

Looking good for now

We’re pretty certain to have at least a couple of years of decent EPS growth (coupled with a quick rise to a nice dividend yield), but longer-term growth is going to be dependent on Royal Mail bagging a big share of the parcels market — it’s looking like it’s doing well enough for now, but there’s a lot of competition out there these days.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan does not own any shares in Royal Mail.

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