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Is the Royal Mail share price a bargain buy?

If you’re the chief executive of a big company, it must be awkward if the share price rises when you resign. That’s what happened to Royal Mail (LSE: RMG) boss Rico Back this morning. When his departure was announced to the stock market just after 8am, the Royal Mail share price rose sharply.

Mr Back has been known as the flying postman for his habit of commuting weekly from his Swiss home to the UK. However, today’s announcement suggests to me that Royal Mail’s board aren’t happy with the pace of change he’s achieved since taking charge in June 2018.

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Parcel shift faster than expected

I do have some sympathy with Mr Back. Royal Mail’s large, employed workforce enjoys union representation and better conditions than the army of self-employed couriers who work for rival parcel firms. Pushing through automation, job cuts and changes to working practices was never going to be easy.

However, I think Royal Mail does have some advantages. These include a near-50% share of the UK parcel market and an unmatched network of potential pick-up and drop-off locations (post offices).

Recent updates from the firm have made me think that Mr Back’s turnaround plan has been happening too slowly to keep up with changing market conditions. Investors seem to agree — Royal Mail’s share price has fallen by more than 60% since the German executive took charge.

In today’s update, the firm says that interim executive chairman Keith Williams will take charge. Mr Williams will lead discussions with stakeholders about “an accelerated pace of change across the business”. It seems that despite clocking up a lot of air miles, Mr Back wasn’t moving fast enough.

Is Covid-19 causing problems?

Today’s update also reveals the impact the coronavirus pandemic has had on Royal Mail’s operations. The company says it saw a “substantial switch from letters to parcels” in April, with parcel volumes up 31% and letter numbers down by 33%. Despite this, total parcel and letter revenue fell by £22m in April.

This massive change in mail patterns must have been hard to handle. High staff absence rates won’t have helped either. These peaked at 20%, but are now down to 11%. Frontline staff who’ve worked through the pandemic will receive a £200 bonus in June, while Royal Mail’s board has decided that executive directors will not receive a bonus for 2019/20.

However, the big question is whether Mr Williams will be able to deliver a new turnaround plan that can rebuild Royal Mail’s profits (and share price) without triggering fresh rounds of industrial action. We’ll learn more when the group’s results are published in June.

Why Royal Mail shares could be a value buy

City analysts expect Royal Mail’s profits to fall to just £1.2m over the coming year. Clearly, the short-term outlook is expected to be grim. But does the postal operator’s low share price provide an opportunity for bargain-hunting investors?

I think it could. It’s worth remembering that Royal Mail’s property portfolio alone was valued at £3.1bn in September 2019. That’s almost double the current market cap of £1.6bn. Debt levels remain very low too.

I think Royal Mail should be able to transform itself into a modern and profitable parcels business. Although I’ve been wrong about the Royal Mail share price before, I do see value at current levels.

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Roland Head 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.