International Distribution Services (LSE: IDS) — formerly known as Royal Mail — shares have experienced an extraordinary collapse of late. Only a few months ago, they were trading near the 300p level. Today however, they can be snapped up for less than 200p.
When I last covered Royal Mail shares back in August, I said I didn’t like the risk/reward proposition they offered me. Has the recent share price fall changed my view? Let’s discuss.
Poor trading update
International Distribution Services posted a trading update on Friday and it made for grim reading. For the six months ended 30 September, adjusted operating loss was £219m, compared to a £235m profit a year earlier. Meanwhile, cash outflow for the period was £274m, compared to a cash inflow of £114m a year earlier.
Looking ahead, the group advised that for the full year (ending 27 March 2023), it expects its Royal Mail division to generate an adjusted operating loss of around £350m. This includes the direct, immediate impact of eight days of industrial action that have either taken place or been notified to the company. Yet it excludes any charges for voluntary redundancy costs (the company is planning to let a lot of workers go). However, it noted that the loss could increase to around £450m if it loses customers as a result of disruption.
The company also noted that the Communication Workers Union (CWU) has threatened a further 16 days of strikes in November and December.
It’s worth pointing out that there was one positive from the update and that’s that performance of its GLS business – the postal and delivery service operating in Europe. It remains on track to meet full-year expectations of an adjusted operating profit of between €370m to €410m.
But overall, the update was pretty poor. It showed that Royal Mail is expecting some major challenges at the moment.
Should I buy ‘Royal Mail’ shares?
In light of this update, I’m not keen to buy those IDS/Royal Mail shares for my portfolio right now.
One reason I say this is that it’s hard to put an accurate valuation on the stock because we don’t know what earnings are going to be. A month ago, analysts were expecting earnings per share of 15.5p for this financial year. However, now they’re expecting 8.7p. I would expect to see further downward revisions. So working out the real price-to-earnings (P/E) ratio here is difficult.
It’s a similar story with the dividend. Right now, analysts expect a payout of 17p per share for this financial year. However, I think it’s unlikely the payout will be this big as earnings are projected to be far lower than this. So we don’t know the real dividend yield.
Another issue to consider is that trading at Royal Mail is highly sensitive to the UK economy. If economic conditions continue to deteriorate, it could put further pressure on Royal Mail shares. It’s worth noting that the number of shares on loan has recently risen significantly. This indicates that hedge funds have been increasingly betting that the stock will fall.
So, for now, I’m going to give this stock a miss. I think there are safer stocks to buy for my portfolio today.
