This report is an updated version of the report published on 17 May 2022 at 9:49 AM GMT+1.

Royal Mail PLC

Royal Mail PLC (LON: RMG) is an FTSE 100 listed Courier Company that provides postal services.        

The company will release its FY22 results on 19 May 2022.

Investment Rationale for Valuation – Buy at GBX 336.18

• Q3FY22 Update: The Group reported Q3 performance in line with expectations. 439 million parcels have been handled during the quarter, with domestic parcel revenue growing by 43.9%, compared to Q3FY20. Domestic parcel volumes grew by 33% in Q3FY22 when compared to Q3FY20.
• Transformation Initiatives: As part of its strategy and transformation program execution, the company has entered into formal consultation on a reorganisation to streamline operational management. These initiatives will help to improve performance at a local level and are expected to deliver annualised benefits of around £40 million.
• Decent Fundamentals: The Company reported revenue of £6,072 million in H1FY22, reflecting an increase of 7.1% on the prior corresponding period. Profit before tax grew substantially to £315 million in H1FY22, compared to £17 million in the prior corresponding period.
• Share Buy Back: On 18 November 2021, the company has announced that it has entered into a non-discretionary agreement with Merrill Lynch International in regard to buy back of Royal Mail's ordinary shares of one penny each for an aggregate purchase price of up to £200 million.

Key Risks

• Macro Risk: The current economic scenario has been very challenging due to the confluence of certain macro factors like high inflation levels, hike in interest rates, geopolitical tension and supply chain disruption, to name a few.
• COVID Risk: The Group’s performance has been impacted due to the spread of the Omicron variant, with around 15,000 staff being sick or affected in early January 2022. Further, the threat of the impact of different variants still lingers on.  

Financial Highlights (for the quarter ended December 2021, as of 25 January 2022)

(Source: Company Website)

• Revenue: Group revenue was at £3,554 million in Q3FY22, with Royal Mail delivering £2,420 million in revenue.
• GLS Guidance: The company expects full-year revenue guidance growth of around 9% in Euro terms, and an operating profit margin of 8%, from the GLS segment.

One Year Share Price Chart

(Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY23E)  

Conclusion

Despite the impact of COVID and fluctuations in monthly volumes, the Group has stated that its overall performance has been in line with previous guidance of around £500 million adjusted operating profit for FY 2021-22.

The stock made a 52-week high and low of GBX 613.80 and GBX 316.10, respectively.

Based on the decent performance, transformation initiatives and support from the valuation as done using the above method, we have given a “Buy” recommendation on Royal Mail PLC at the current market price of GBX 336.18 (as of 17 May 2022, at 08:32 AM GMT+1) with lower double-digit upside potential based on 7.44x Price/NTM Earnings (approx.) on FY23E earnings per share (approx.).

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.’

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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