Remember the bitter political battle that followed last year’s controversial privatisation of Royal Mail Group (LSE: RMG)? The government priced its shares at 330p, only to see them soar 38% on the first day of trading to 445p.
Business Secretary Vince Cable dismissed the buying frenzy as “froth and speculation”, but it continued fizzing into January, when the shares peaked at 618p.
Undervaluing the 500-year old institution cost taxpayers an estimated £2.3bn. But did politicians really undervalue Royal Mail, or did excitable markets overvalue it?
Increasingly, it looks like the latter.
Right now, the shares trade at around 430p, after falling almost 10% in a morning after Royal Mail revealed a 21% drop in operating profits in the first half to £279m. That was down from £353m at the same stage last year.
The “froth and speculation” has now been thoroughly blown away.
Red Letter Day
There was some good news in today’s results. Management has been improving performance and cutting costs, as you would expect in a former state-owned enterprise.
Its General Logistics Systems business continues to perform well, with revenues up 7%, while profit margins increased, letter volumes fell more slowly than expected (although they still fell), and letter revenues actually increased.
But RMG also faces some right royal challenges. The most unnerving comes from online retail behemoth Amazon, which now has its own delivery network, and launched its same-day delivery service in October.
Royal Mail’s parcels delivery service was expected to be the big growth area, given the rise of online shopping. So a 1% slide in profits to £1.46bn is a major concern.
Its statutory obligation to provide a universal postal “one price goes anywhere” service six days a week could make it harder for it to fight back, especially given Amazon’s deep pockets, and the advantages enjoyed by nippier rivals such as TNT and DBD.
Management is now putting its faith in the busy festive period, which will determine overall performance. But a good investment isn’t just for Christmas, it should deliver all year round.
Late Delivery
Perhaps the biggest losers from the Royal Mail privatisation weren’t taxpayers after all, but the Johnny-come-latelys who bought its shares at around 600p. They will be nursing losses of up to 30%.
Yet today’s share price fall may tempt some long-term investors, who can now lock into a prospective dividend yield of around 4.4% a year.
But remember, this stock is notoriously difficult to value. Just ask Vince Cable.
