Tuesday, 21 October 2014

Royal Mail still in the post!

Royal Mail @ 432p

Strange that the Royal Mail flotation is no longer being sounded in the House of Commons as a political football now that the share price is much closer to its supposed discounted launch price.
Once again its use by Labour, seemingly demonstrates that they have little understanding of markets themselves and would use any little thought out opportunity to influence voters minds with something that, it could be said has subsequently backfired and been quickly resigned to yesterdays news, as quickly as the company's prospects appear to have been deflated.

As ever, with these things, and particularly where politicians are concerned, the first question following such headlines and statements, should always be "what's in it for them?"
That answered you can at least consider what they are saying with a little more balance.

The fact remains that the issue unexpectedly recalled the hype of earlier privatisation issues, along with an over subscribed small investor proportion being scaled back and leading to greater demand in the short term.
Like any market, the number of buyers over sellers, dictates the price, and I suspect, market makers boosted this in the short term as they came on board to maintain liquidity of a new issue, providing a further boost.

Either way, and for a time, it seems that the value of Royal Mail got ahead of itself despite a gloomier wider economy, and as such, the price of the issue should never have been used for the target practice that followed.
Instead the debate should always have been about whether or not it should have been privatised given the use of state owned industry to maintain employment levels during a recession.

Most investment cases involve speculation as to future prospects, are sold on the positives, and are usually in an overbought or oversold situation, which can be influenced by company news and/or wider market and economic sentiment.

Anyway, as things stand, at the current price, the Royal Mail stands at a current historic valuation of 21.4 time earnings, and a yield of 2.4%, albeit the actual yield has been determined from just a 60% of a full year return.
The current valuation and share price, taking into account rapid growth (if you can believe it), falls to 13.2 time earnings and a 4.9% yield for the current year!

So even at this price these kind of growth multiples and speculation put the company into a high growth category, which still seems hugely risky given the competition for parcel delivery from its customer, Amazon, and other more established postal names.
I bought a suit from Marks & Spencers last year, which was efficiently delivered (almost tracked up the motorway), by Amazon!

That kind of growth multiple is also comparable to maturing technology companies such as Google and Apple, giving further food for thought perhaps. 
However, the investment case for Royal Mail has always been its dividend, so at 4.9% for next year v. some of the original investment case suggesting 6% for the current year (for income seekers), it still seems overpriced and therefore in risk of falling back to its offer price.

So my earlier question remains: Royal Mail IPO: first class or second class!
Only time and markets will tell.

Earlier related posts:
Royal Mail IPO: first class or second class!

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