Royal Mail remains top dog as new share sell-off looms
Competitors have wilted as market leader flexes muscles - and Royal Mail shares have climbed
Aggressive competition in the UK mail and parcels market looks like it is starting to ease, paving the way for improved financial performance at market leader Royal Mail.
A de jure monopoly for 350 years, the UK mail industry was opened up to full competition in 2006. Nimble competitors Yodel, Hermes, UK Mail and Whistl now vie toe-to-toe with Royal Mail on its traditional mail patch – as well as in the parcels market – but without the legacy cost base. Yet reports of the death of the red post box are greatly exaggerated.
City Link's high profile collapse over Christmas 2014 and recent cut-backs to services at mail and parcels rival Whistl have boosted Royal Mail's share price, which, before George Osborne's announcement that the government would sell its remaining stake in the company, was trading at its highest level since May 2014.
Having joined the stock market at 330p in October 2013's IPO (initial public offering), shareholders who bought Royal Mail shares at flotation now sit on a handsome profit.
There are other catalysts on the horizon too: tough prior year earnings comparisons are falling out, margins are increasing and value is being unlocked from the balance sheet.
Comparisons for revenue and profit were tough as the business exited public ownership. Stamp prices were increased dramatically in the years running up to Royal Mail's privatisation, with a 14p hike in 2012 to 60p for a first class letter and 50p for second class mail.
If margins can be brought up to industry averages, Royal Mail can increase operating margins around 300 basis points from its current 4.6 per cent. Every 100 basis points of margin expansion is worth an additional £100 million in pre-tax profit, calculates Berenberg analyst Matthew O'Keeffe.
The balance sheet is another strength. Royal Mail unlocked around £111 million of cash from surplus assets in London at the end of 2014. O'Keeffe reckons other London properties could be worth as much as £1 billion, close to a quarter of the business's market capitalisation.
'We believe that the eventual transformation of Royal Mail (in both operational and financial terms) is likely to release tremendous value that is only modestly reflected in current estimates or valuations,' writes O'Keeffe.
A key challenge for the business is managing the decline in its mail division, where volumes are forecast to drop between 4 per cent and 5 per cent in the period to 2023. Delivering growth in structurally challenged markets is not without precedent, as investors in tobacco and some of the better quality media companies can attest. Royal Mail's market leadership and its exposure to the growing parcels market mean it is well placed to deliver.
Royal Mail: government sells shares at £5 a pop, raising £750m
The government has sold half of its 30 per cent stake in Royal Mail, raising another £750m for the treasury.
The Department for Business, Innovation and Skills placed 15 per cent of the company's shares with City institutions overnight, selling them at 500p a share – a significant premium to its share price when it was privatised in 2013. The sale was conducted by Bank of America Merrill Lynch and JP Morgan, with Goldman Sachs also involved.
The government said it made the overnight sale following independent financial advice, which suggested that Wednesday was a good opportunity to sell down its stake, thanks to "current favourable market conditions". It says the proceeds will be used to pay down the national debt, reports The Guardian.
Up to 1 per cent of the shares of the government's remaining holding will be given to Royal Mail staff. The government awarded 10 per cent of the shares to employees as part of the controversial flotation in 2013.
In his annual Mansion House speech in the City of London, Chancellor George Osborne said: "We want to help the Royal Mail attract more investment and serve its customers, and use the money we raise in return to pay down the national debt."
Business Secretary Sajid Javid said the £750m fee "represents good value for taxpayers", adding: "That money can be used to reduce public debt, which is how we will deliver lasting economic security for working people."
But shadow business secretary Chuka Umunna MP said: "It's disgraceful the government is rushing to dump its stake in Royal Mail to City speculators without giving ordinary investors a look-in."
And the postal workers' union CWU told Sky News the unexpected sale showed the Conservatives were "only interested in privatisation dogma and making the rich richer".
Shares in the Royal Mail fell today after the government announced plans to sell off its remaining 30 per cent stake in the company.
Chancellor George Osborne revealed that the shares, currently worth £1.5bn, would be sold at some point this year to help pay off the UK deficit.
"It is the right thing to do for the Royal Mail, the businesses and families who depend on it – and crucially for the taxpayer," he told the House of Commons during a debate about the Queen's Speech. Shares in the Royal Mail subsequently fell almost 2.3 per cent to 515p in lunchtime trading, reports City AM.
Osborne assured his fellow MPs that the new Tory government "will only sell our stake when we can be sure we are getting value for money".
Nevertheless, the sell-off is likely to "prove hugely controversial", says the Daily Telegraph.
It comes just over a year and a half after the company was listed in a historic privatisation in October 2013. The share price leapt by 38 per cent from its initial price of 330p on the first day of trading and later peaked at 615p, prompting anger from opposition MPs.
The Treasury is yet to make a decision on whether its shares will be sold privately to investors or to the public.
The move comes as part of Osborne's efforts to shave £4.5bn off the UK's debts, with government departments expected to find a further £3bn of savings this financial year. The NHS, education and foreign aid have been ring-fenced from the cuts, which will be detailed in the Chancellor's new Budget on 8 July.
Royal Mail: Myners report clears government over sell-off
A report commissioned by Vince Cable from Lord Myners, the former Labour city minister, has broadly backed the way the Royal Mail sell-off was handled despite finding that the new company was undervalued by £180m and calling for greater transparency.
Myners said the privatisation was handled with "considerable professionalism" and represented "significant value" for the taxpayer.
As for the initial price of shares in Royal Mail, The Guardian recalls that opponents of the sell-off, including some MPs, have claimed it was set as much as £1bn too low.
Myners's figure of a £180m undervaluation is comparatively modest, therefore. He told the BBC that "if any money had been left on the table it was pretty small".
The extra £180m could have been earned if the share price had been set 30p higher, says Myners in his report. But he adds that doing so would have involved "substantial" risk.
However, Myners did say lessons could be learnt for future privatisations. He called for greater transparency and suggested using digital auctions which would "make the sale process much more flexible".
Royal Mail's share price leapt by 38 per cent from its initial price of 330p on the first day of trading in October 2013. They later peaked at 615p, prompting anger from MPs and others. The price yesterday was 394p.
In a report that broadly exonerates the government, the former minister writes: "I regard the Royal Mail privatisation to have been a complex exercise executed with considerable professionalism. Many previous governments attempted to sell but failed.
"The sale was done against a backdrop of global economic uncertainty and a threat of industrial action, which go a long way towards explaining the cautious approach taken throughout the process.
"We found no evidence to challenge the general assertion that an IPO price greater than 350-360p could have been achieved and we accept that a decision to revise the range would have come with added uncertainty and risk. The right decisions were made."
Royal Mail shares dive as profits fall by a fifth
Royal Mail shares fell by almost six per cent when trading began this morning after the company announced a 21 per cent fall in half-year profits.
Competition from online sellers offering same-day delivery and other courier services continues to put pressure on the recently privatised mail service.
Royal Mail bosses said they had halved the company's expected growth rate for UK package deliveries to just one or two per cent after a push from e-retailers such as Amazon to offer parcel delivery options of their own.
Pension costs also contributed to the £279 million fall in operating costs, Sky News reports.
Overall letter volume fell by three per cent, but profits from letter delivery increased by one per cent due to increased stamp charges.
In spite of the fall in profits, chief executive Moya Greene said: "I am pleased with our overall performance. We have delivered two per cent revenue growth together with margin expansion, in line with our expectations."
She added that Royal Mail was would work with e-retailers "to be more flexible" and that Royal Mail may accept different types of parcels it had previously declined to deliver.
Greene said that the postal service would introduce later acceptance times and weekend collection to help retailers to deliver goods more quickly.
Michael Hewson of CMC Markets told The Guardian that deliveries are becoming an increasingly difficult market: "The explosion in on-line retailing, click and collect delivery and the use of mobile apps this year is likely to see fierce competition between logistics providers with UK Mail, UPS and Fedex likely to provide plenty of competition, while the recent tie-up between Amazon and Connect Group to provide a 24-hour service for parcel delivery to selected local locations, like underground stations, newsagents and shopping centres, could make a significant dent in Royal Mail's revenue, particularly since Amazon is Royal Mail's largest parcel customer."
Royal Mail shares fell from 477p to 449.45p in the first hour of trading, before recovering slightly to 455.5p by 9.30am.
When the company was privatised just over a year ago shares were sold at 330p each. They peaked at 604.5p in January this year.
Royal Mail shares plummet after parcel revenue warning
Royal Mail shares have plummeted to their lowest level since the company was privatised in October, following warnings that the parcels revenue for the year would be lower than expected.
The company warned that price changes and competition from its rivals have hit its parcels business, with revenue down one per cent in the three months to 29 June compared to the same period in 2013.
The company said it was still likely to meet expectations for its overall annual performance, with revenues for the overall group climbing two per cent in the last quarter.
Nevertheless, stock dropped by as much as four per cent to 445.1p this morning – its lowest price since Royal Mail was floated in October. Shares were initially sold at 330p but immediately surged to 450p at the start of trading.
The sharp rise was, at the time, dismissed as "froth and speculation" by Business Secretary Vince Cable. He has since accepted demands by the National Audit Office for a review into the government's listing process.
The stock has been steadily declining since a peak of more than 600p in February.
Royal Mail said it had also been hit by the impact of Amazon's move to scrap free delivery on orders below £10 – although the company said it is "fighting back" with measures such as a new Sunday delivery service for online shoppers.
"It appears that the honeymoon period is over for Royal Mail as the realities of its competitive environment intensify," Richard Hunter, head of equities at Hargreaves Lansdown stockbrokers, tells The Guardian.
The Daily Telegraph says small investors "are still in the money after the controversial float, but their potential profits are slowly being whittled away".
A report from the Government's Business, Innovation and Skills Select Committee, published earlier this month, found that taxpayers may have lost out on about £1bn from the undervaluing of Royal Mail.