Royal Mail PLC

Royal Mail PLC (LON: RMG) is an FTSE 100 listed Industrial Transportation group having operations spread internationally.

On 18 November 2021, RMG will release H1 FY22 results for the six months ending September 2021.

RMG had paid a final dividend of 10 pence per share on 06 September 2021, while the ex-dividend date was 29 July 2021.

Investment Rationale for Valuation – BUY at GBX 474.00

• With regards to the top-line business, the Company’s total revenue during Q1 FY22 grew by around 12.5% as compared to Q1 FY21 and about 20.2% when compared with Q1 FY20.
• On the liquidity front, the current ratio and the quick ratio remained significantly ahead of the respective industry median of 0.98x and 0.96x during FY21, illustrating that the Company remained more capable of paying short-term obligations when compared with the industry.
• In terms of profitability, the Company’s adjusted operating profit surged by around 116% during FY21
• From a technical standpoint, RMG is hovering around the lower Bollinger band, indicating an upside potential in the stock price.
• Moreover, the 14-days RSI of ~31.99 also supports an upside momentum in the stock price.

Key Risks

• The Company had not issued detailed FY22 guidance due to the short-term uncertainties.
• The growth prospects would get impacted by the change in consumer patterns and economic factors such as GDP growth and inflation.
  

AGM Trading Statement (for three months ended June 2021, as of 21 July 2021)

(Source: Company Result)

• The total letter revenue for Royal Mail had demonstrated a healthy increase of about 25.7% during Q1 FY22 as compared to Q1 FY21.
• The volumes for the GLS segment during Q1 FY22 remained significantly ahead of Q1 FY21 and Q1 FY20 levels.
• The Addressed letter volumes had witnessed a strong increase of 22% during Q1 FY22 as compared to an equivalent period of the prior year.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

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

Conclusion

The Company had shown resilient revenue performance across both Royal Mail and GLS during the first quarter of FY22. Moreover, the Company will further come up with July and August 2021 updates on 23 September 2021. With regards to the GLS business, the Company had projected FY22 revenue growth of low-single-digit % and operating margin of around 8.0%. Meanwhile, RMG had also estimated a fluctuation in volumes due to the Covid-19 restrictions. The stock made a 52-week low and high of GBX 151.33 and GBX 600.98, respectively. 

Based on the decent Q1 FY22 revenue performance, strong liquidity profile, and valuation as done using the above method, we have given a “BUY” recommendation on Royal Mail PLC at the current market price of GBX 474.00 (as on 09 September 2021 at 09:40 AM GMT), with lower-double digit upside potential based on 9.50x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.). 

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peers/ Industry information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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