Royal Mail shares: Goldman Sachs sets 610p target
Bank originally advised government to set price of 330p for Royal Mail shares
GOLDMAN SACHS has said that shares in Royal Mail could reach 610p, almost double the price recommended by the bank when the postal service was privatised last month.
Along with UBS, Goldman Sachs advised the government to set the share price at 330p, valuing the company at £3.3bn.
Shares in Royal Mail surged as soon as they went on sale, and have continued to rise. They opened this morning at 568.5p, a gain of 72 per cent on their initial value.
Analysts at Goldman Sachs now expect the price to scale new heights.
“In its research note,” the International Business Times reports, “Goldman said it thinks Royal Mail's heavy exposure to the high-growth parcels market, the firm's existing core network across the UK ... and the potential for productivity improvements will all drive up profit.”
Vince Cable yesterday defended the initial valuation against charges that the government had underpriced Royal Mail. He repeated his insistence that short-term price rises were “froth” that did not necessarily reflect the underlying value of the company.
Cable and his minister Michael Fallon, told MPs that they decided against increasing the share price before the flotation because of market fears about a potential US debt default.
Royal Mail profits leap as Cable faces questions
Online shoppers have driven Royal Mail profits up to £233m for the six months to the end of September, up from £94m for the same period last year. That figure excludes a one-off windfall resulting from pension reform, which led to overall pre-tax profits of £1.6bn.
Shares in Royal Mail rose sharply on the news, opening at 550p, up 9 per cent on last night’s closing price
The rise in profits came despite a 4 per cent drop in revenue from letter deliveries, which was offset by a 9 per cent rise in parcel revenues.
"Our first-half financial performance was in line with our expectations of delivering low single-digit revenue growth and margin expansion," said Royal Mail chief executive Moya Greene, quoted by the BBC.
The Telegraph suggests that the strong performance of the newly privatised Royal Mail will “fuel accusations that Royal Mail has been sold on the cheap”.
Vince Cable, the Business Minister, whose department oversaw the sell-off, will be questioned by a parliamentary select committee later today, along with his key adviser from the investment bank Lezard.
Individuals who invested £750 in the offering would now be sitting on shares worth £1,250 at this morning's opening price of 550p.
Cable has previously dismissed the early gains as “froth” and said the true value of the shares would not emerge for six months.
Royal Mail shares: price rise 'was expected'
The Government expected shares in Royal Mail to rise after privatisation, according to a report seen by Sky News, fuelling claims that the company was deliberately underpriced.
"Nearly £2bn was raised for the Exchequer, and the Government still holds a 30 per cent stake in a company that has, as expected, increased in value following the introduction of private sector ownership," says the report from the Shareholder Executive, which manages public shares in state-owned businesses.
High public demand led Royal Mail shares to surge as soon as they went on sale. Individual investors were allowed to buy just £750 worth of shares, which would be worth £1,211 at this morning's opening price of 533p.
Vince Cable will be questioned about the Royal Mail sell-off by the Business, Innovation and Skills Select Committee tomorrow. He has previously dismissed the early gains as “froth” and said the true value of the shares would not emerge for six months.
Royal Mail shares: banks could lose millions
The banks that valued Royal Mail shares at 330p could have their fees docked for undervaluing the company, the Daily Mail reports.
The paper says that "ministers are ready to use powers to claw back up to £4m from their advisers if the price does not settle closer to the original offer."
High public demand led Royal Mail shares to surge as soon as they went on sale. Individual investors were allowed to buy just £750 worth of shares, which would be worth £1,236 at this morning's opening price of 544.5p.
The Observer had predicted on Sunday that the banks might come in for criticism. "Goldman Sachs and UBS were the lead bookrunners on the float, meaning they essentially conjured up the price," the paper reported, "and while the sniping has died down a tad, the coming days offer the potential for renewed hostilities."
The government took advice from the investment bank Lazard in setting the Royal Mail's value at £3.3b before the sell-off, but the Guardian recently reported that another bank, JP Morgan, had valued the company at £10b.
"The US bank declined to comment but well-placed sources confirmed the figure of £10bn," the paper reported. "Others pitching to sell the Royal Mail on behalf of the government had also priced the mail company as high as £7bn."
Vince Cable, the Business Secretary, has described the early gains as "froth" and said the share price would take six months to settle to its true value.
Royal Mail shares: Should you sell or hold?
by Jane Lewis
During the frenzied days of grey market trading ahead of Royal Mail's stock market debut, several analysts observed that they hadn't seen such fervour since Facebook's float last year.
You could almost hear the sirens sounding in Whitehall. Facebook's over-hyped IPO has, after all, become notorious for the way small investors were burned by professional Wall Street slickers who immediately flipped the stock, causing shares to crash by a quarter within a fortnight. It was not a comparison that ministers trumpeting the return of a responsible shareholder democracy were keen to promote.
We can see from the IPO data released this week that the Government has done its darnedest to avoid a similar conflagration at Royal Mail: using the share allocation process to weed out those deemed most likely to flip (or in British parlance "stag") shares in pursuit of a quick killing.
The few successful applicants among the 800 or so big institutions who unleashed £28bn to chase £1.4bn worth of shares were all "stable" outfits like pension funds and foreign sovereign wealth funds - neither renowned for their short-term approach. And the same thinking was apparent in the treatment of private investors, which overwhelmingly favoured small timers. Anyone rich or ambitious enough to apply for more than £10,000 worth of shares was ruled out altogether.
That of course didn't prevent a bean-feast at the opening of conditional trading. Shares, sold at 330p (valuing Royal Mail at £3.3bn) rose to an initial high of 459p before settling back to 431p as a number of small investors sold their stake.
But the likely thinking was that if you're sitting on a two hundred quid profit from your initial £750 investment, you're less likely to cash it in when trading proper starts next week than if you'd made a similar percentage gain on £10,000.
The high premium has fuelled the wrath of critics who claim it shows the government severely undervalued Royal Mail - short-changing the taxpayer to the tune of £1bn. The Business Secretary, Vince Cable denies this. "You get an enormous amount of froth and speculation in the aftermath of a big IPO of this kind," he said. "What matters is where the price eventually settles."
That question of what the Royal Mail is really worth is at the heart of the key decision now facing investors: should they bank their profits, or stay in for the long-haul?
The big problem in making the call is that estimates vary so widely. When the offer was announced last month, there were doubts that shares would make 330p, let alone the 450p that Panmure Gordon's Gert Zonneveld, reckons they're worth. Another City player, Canaccord Genuity, has suggested the company is worth nearly £6bn if you factor in the huge property value of its sites in London.
One way of gauging Royal Mail's actual value is to look at what some of its rivals in Europe are worth. Its closest peer is arguably the Belgian postal service, bpost - which also has a monopoly in its core market, similar profit levels, and is facing sliding letter volumes offset by a burgeoning, ecommerce-based parcels business. Bpost is currently trading at seven times earnings. Apply that to Royal Mail and you get a valuation of £2.7bn - considerably below the opening £3.3bn price.
Some have concluded from that that anything above 35op a share "is getting into the realms of irrational exuberance" - particularly when you factor in a highly competitive parcels market and the continuing threat of industrial action. The near universal take-up of free shares by postal workers may help avoid a value-destroying strike. But it can't be ruled out.
Set against those considerations, however, is the sheer volume of demand for Royal Mail shares, the fat dividend, and reports that a good many buyers are tucking shares straight into their Isas. The wider market mood is also a factor. Given a generally benign investment environment for equities, it's arguably a good time to "run your winners" rather than dump a rising share at the first opportunity. That's certainly been the experience of those buying into recent IPOs, including estate agent Countrywide and builder Crest Nicholson - both up by over 50% since launch.
Ultimately, what investors decide to do with their shares must boil down to their own investment priorities. If you view Royal Mail as an income rather than growth stock, you should hang on in there - if only on grounds that the dividend payment, when reinvested, will form a large part of total returns.
But keep a weather eye on the price movement. Perhaps the best advice is to do your own research, and establish a target price in your mind at which to take profits. In a straw poll run by The Daily Telegraph on Friday, most punters placed that well above 400p. Food for thought.
Royal Mail: shares surge as trading begins 11/10/2013
Shares in the newly privatised Royal Mail jumped by 38 per cent in the first few minutes of trading on the London Stock Exchange.
The price, which had been set at 330p per share, reached a peak of 456p before settling back to 437p by 3pm - a rise of 32 per cent. That represents a paper profit of £240 for private investors who took part in the Royal Mail offer.
Investors who applied for up to £10,000 worth of shares - around 690,000 investors - will receive 227 shares worth £749.10. But the 34,500 investors who applied for more than £10,000 worth of shares will get nothing.
In total, more than 270,000 applicants will receive at least half of the shares for which they applied.
Demand for shares in the mail service reached unexpectedly high levels, making it one of the most sought-after privatisations since the 1980s sell-off of state assets.
Critics last night claimed the decision had been made to enable the government to boast that it was a "people's privatisation".
Financial institutions, such as pension funds and hedge funds, took 67 per cent of all shares on offer, leaving the rest to small investors and Royal Mail workers.
Despite the looming postal workers' strike ballot, 99.7 per cent of Royal Mail employees took up their free allocation of shares. Any employees who applied for extra shares also had their applications met for up to £10,000.
Billy Hayes, general secretary of the Communication Workers Union, which is vehemently against privatisation, said he did not expect the take-up to affect the outcome of next week's strike ballot. He told the BBC: "In austerity Britain no one is going to turn down free money. The real test will be next Wednesday, and I am convinced that postal workers will vote for action."
Conditional trading began today at 8am - a process likened to the gap between exchange and completion when buying a home. Any trades agreed will not be fulfilled until full open market trading begins on Tuesday 15 October.
Shares look set to rise from 330p to around 400p by the end of day one, which would give investors with £749.10 of shares a profit of £158. ·