Royal Mail PLC

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

Investment Rationale – BUY at GBX 273.70

• Growth Catalysts: Automatic parcel processing, digital transformation, strong international capabilities, and diversified network holds potential for the long-term growth.
• Solid Guidance: For FY23, RMG expects to deliver high single digit revenue growth and operating profit €370 - €410 million, though GLS division.
• Shareholders’ Return: RMG has returned £400 million return to shareholders through share buyback and special dividend.
• Technical Indicator: From a technical standpoint, the current stock price is hovering close to the lower Bollinger Band, while the 14-day RSI (~33.14) is in the oversold zone.
• Undervalued Multiples: On a forward 12-month basis – key trading multiples (EV/Sales, EV/EBITDA, Price/Earnings, Price/ Cash Flow, and Price/Book) are undervalued against the average of the Industrials sector.

Key Risks

• Volume Uncertainty: The underlying structural changes in consumer behaviour can reduce letter volumes.
• Economic Slowdown: British economy contracted in April 2022, facing pressure from the rising fuel prices and household energy bills. It is reflecting the intensified cost-of-living crunch. Moreover, the interest rate worries, the US dollar hitting two-decade peaks, and subdued economic forecasts can continue to impact corporate profits and put pressure on equity markets.
• Supply Chain Snags and Rising Costs: Increasing wage inflation and rising operating costs pose a risk to the Company’s profitability margins. Moreover, the shortage of fuel and lorry drivers cause fears around supply disruption.

Financial Highlights (for the year ended 27 March 2022, as of 19 May 2022)

(Source: Company Website)

• Resilient Performance: RMG reported a decent financial performance in FY22, driven by the growth in GLS division, while the domestic parcel volume for Royal Mail remained 31% higher than the pre-pandemic period.
• Maintained Dividend: With solid cash generation of £353 million in-year trading cash flow, the Group recommended full-year dividend of 20 pence per share, in line with policy.

Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY23E)

*Peers: Global Ports Holding PLC, Wincanton PLC, James Fisher and Sons PLC, and Redde Northgate PLC.

*All selected peers are LSE listed Companies from the Industrials sector.

Conclusion

The transformational programme undertaken to streamline operational management may result in expected annualised benefits of around £40 million, with £30 million in FY23.

Based on the decent fundamentals, transformation progress, and favourable valuation conducted above, we have given a “BUY” recommendation on Royal Mail PLC at the closing market price of GBX 273.70 (as of 14 June 2022), with a lower-double digit upside potential based on 6.86x Price/NTM Earnings (approx.) on FY23E Earnings per share (approx.).

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 decisions should be made depending on the investors’ appetite for 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 is subject to the factors discussed above.

Note 3: Target Price refers to a price level that 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 4:  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.

Note 5: Dividend Yield may vary as per the stock price movement.

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 the 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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