Royal Mail PLC   

Royal Mail PLC (LON: RMG) is an FTSE 100-listed courier company. It’s a British postal service and courier company.

RMG will release a trading update for the nine months period ended 26 December 2021 on 10 February 2022.

Investment Rationale – BUY at GBX 439.10

• Expected Guidance: For FY22, trading is in line with the earlier estimate of roughly £500 million adjusted operating profit. With the restructuring charge factored in, adjusted operating profit is now expected to be around £430 million.
• Increase in Revenue and Volumes: The company's domestic revenue and volume have increased by 43.90% and 33.00% in Q3FY22, respectively, from Q3FY20.
• Adequate Leverage: The company has recorded net debt of £540 million in H1FY22 from £1,006 million in H1FY21 due to repayment of the loan from profits.
• Technical Indicator: From a technical standpoint, the stock's current market price is trading at a lower 14-days RSI of ~35.19, thereby reflecting oversold position.

Key Risks

• Adverse Covid Impact: The Omicron impact has increased the absence rates and cost of the company, which might impact the company's annual results.
• Macro Effects: Changes in consumer patterns and economic factors like GDP growth and inflation might impact on growth prospects of the company.

Financial Highlights (for the half-year ended 30 September 2021, as of 18 November 2021)

Source: Company Website

• Increase in Top Line: The company has reported an increase in revenue by 7.07% to £6,072 million in H1FY22 from £5,671 million in H1FY21 due to a recovery in letter revenue.
• Robust Profits: The company has significantly increased post-tax profits to £270 million in H1FY22 from £14 million in H1FY21.
  

One Year Share Price Chart

(Data Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22E) (Illustrative)

Conclusion

The group is still working on its commercial strategy to target growth possibilities and market share in a market that it expects to transition after COVID-19. As a result, the group concentrates on moving forward with its transformation and efficiency programmes. The stock made a 52-week High and Low of GBX 589.62 and GBX 370.60, respectively.

Based on the decent H1 FY22 financial numbers and support from the Valuation conducted above, we have given a "BUY" recommendation on Royal Mail PLC at the current market price of GBX 439.10 (as of 31 January 2022 at 08:42 AM GMT), with a lower double-digit upside potential based on 8.54x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

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.

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 unfavourable movement in the stock prices.

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