Should You Join In The Next Royal Mail PLC Share Offer?

The new government has barely warmed its seats in the House of Commons, and it’s already ramped up its plans to sell off publicly owned assets to raise needed cash. Only a week after we heard there’s going to be a new sale of Lloyds Banking Group shares to retail investors, we now have the news that the remaining 30% of Royal Mail (LSE: RMG) that’s still in public hands is to be sold off.

Without the millstone of the Lib Dems round its neck, the new government is a good bit freer to press forward towards its target of clearing the Budget deficit by 2018/19 without raising income tax or VAT. That’s a pretty tall order, and chancellor George Osborne has his eyes on the £1.5bn that could be raised from Royal Mail at today’s valuation.

Want some?

The structure of the sell-off and whether there will be a retail component is not yet clear, but it’s likely to happen later this year and I’ll be very surprised if private investors don’t get a chance to get in on it. The question is, should we want a slice? Well, Royal Mail shares have climbed from their flotation price of 330p in 2013 to 495p as I write — and that’s a very nice 56% profit in a very short time.

But since then, forecasts for Royal Mail’s profits have been scaled back as competition in the parcels market has cut into its profits, and the written letter looks increasingly like it’s going the way of the steam telegraph. Twelve months ago the great and good of the City were predicting earnings per share of 45.8p for the year to March 2016 with a dividend of 25.4p, but today that’s down to 32.5p EPS and a 21.6p dividend.

That would bring us a 24% fall in EPS, ramping March’s modest year-end P/E of 10 up to over 15. For my money, that looks a little too expensive for a company that is really only just facing up to competition that can only intensify in the coming years. There are dividends of better than 4% predicted for this year and next, but they’re only around 1.5 times covered and whether they can continue to grow is an open question just now.

The discount?

But that’s working on the shares’ current valuation, and the coming sell-off is likely to be at a discount to the market rate on the day. So convinced is the market of that that the shares have already fallen by 6.6% since the news of the planned sale was announced.

Whether Royal Mail will be worth buying in the next round will depend on the price at which the shares will be offered, and the government is going to want a successful sale and will surely make us a good offer — although it’s not going to be at the fire sale price that it sold the original tranche of shares.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.