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Is the ‘cheap’ Royal Mail share price a value trap?

The Royal Mail (LSE:RMG) share price has taken a hammering in recent years. A decline in letter volume and increased competition from parcel couriers have contributed to its lack of growth.

Prior to the coronavirus pandemic, the group had been planning a radical turnaround dubbed Journey 2024, expected to require an investment of £1.8bn.

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Group CEO Rico Back has said Journey 2024 was designed to build a parcel-led, more balanced and better diversified international business. To achieve its goals, Royal Mail must turn around and grow in the UK, expand cross-border, scale-up and grow its parcel distribution business.

These are no small tasks. They will take time, focus and money, so until the coronavirus cloud lifts, Journey 2024 is on hold.

Local heroes vs national disgrace

At a time when UK posties are becoming local heroes and heart-warming stories and videos of their exploits are being shared online, the same cannot be said for Royal Mail. The coronavirus pandemic is not bringing many favourable headlines to the UK postal group.

After three weeks of UK lockdown, postal staff are still being reported complaining of a lack of PPE, hand sanitisers and social distancing provision at work.

The group is also stuck in ongoing negotiations with the postal workers’ union. Preventing industrial action is high on its list of priorities, but this comes with additional cost.

So how does the Royal Mail share price look?

In recent times the Royal Mail share price has not been fun to watch. In fact, in the past five years, it has fallen nearly 70%. And even though it has risen 15% so far in April, volatility abounds. That means the FTSE 250 share is down 38% from the beginning of the year.

The group currently has a price-to-earnings ratio of 8 and earnings per share is 17p.

It still expects its underlying operating profits for 2019/20 to be between £300m and £340m. But going forward, it is in the dark until the pandemic subsides. For now, it has suspended its guidance for 2020/21 and cancelled its dividend.

Future outlook

Considering many UK businesses are completely out of action, this puts Royal Mail at a slight advantage. Alos, at the end of March, it had more than £800m in cash and access to £925m in credit facilities. Its business is ticking over and it should benefit from increased demand for home deliveries and online ordering. However, volumes of advertising mail have fallen heavily since the outbreak and international operations have decreased.

Prior to the pandemic, the group expected a 4%-5% annual decline in letter volume from 2020/21 onwards. This would in part be caused by the impact of GDPR, along with UK economic uncertainty created by Brexit.

However, it expected growth in parcel deliveries to offset this. Online shopping is driving parcel growth, both domestically and internationally. GLS, its European parcel network has a £2.9bn turnover. And prior to the pandemic, it expected adjusted operating profit margin to grow at 6-7%.

The Covid-19 outbreak is likely to create “significant uncertainty“. And in light of this Royal Mail said its parcels, international and letters business is likely to be “materially” loss-making in FY2020-21 and GLS profitability somewhat reduced. 

Although at first glance this may seem like a cheap share, I think it continues to have too much uncertainty surrounding it to make it a profitable long-term buy. 

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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.