Royal Mail PLC

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

On 19 May 2022, RMG expects to publish its FY22 report.

Investment Rationale – BUY at GBX 363.60

• 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.
• Business Resilience: As Q3 FY22 performance remained in line with expectations despite the rise of Omicron and increased staff absenteeism, it showed operational resilience.
• Financial Growth: RMG reported an increase in revenue by 7.07% to £6,072 million in H1 FY22 from £5,671 million in H1 FY21 due to a recovery in letter revenue. Subsequently, it had significantly increased post-tax profits to £270 million in H1 FY22 from £14 million in H1 FY21.
• Technical Indicator: From a technical standpoint, the current stock price is around the lower Bollinger Band, while the 14-day RSI (~39.75) is also in the oversold position.
• Undervalued Multiples: On a forward 12-month basis, key valuation multiples (EV/Sales, EV/EBITDA, Price/Earnings, Price/Cash Flow, and Price/Book) are quite lower than the median of the Freight & Logistics Services industry.

Key Risks

• Interest Rate Hike: The Federal Reserve announced a first interest rate hike (by 0.25%) in over three years and indicated seven rate hikes in 2022.
• Ukraine Tension: The mounting concern over the Russian invasion in Ukraine can continue to weigh on the equity market.
• Volume Uncertainty: Macroeconomic uncertainties and underlying structural changes in consumer behavior can reduce letter volumes.
• 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.

Trading Update (for the third quarter ended December 2021, as of 25 January 2022)

• Increase in Revenue and Volumes: The company's domestic revenue and volume have increased by 43.90% and 33.00% in Q3 FY22, respectively, versus Q3 FY21.
• Strong Trading: During Q3 FY22, trading continued to be in line with the market expectations as there was a structural shift in parcel volumes since the start of the COVID-19 pandemic.

Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative)

*Peers: Wincanton PLC, Go-Ahead Group PLC, and Royal Mail PLC.

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

Conclusion

Royal Mail is available at a cheap price given its decent fundamentals, strong interim financial growth, further progress on transformation, structural shift in parcel volumes, strong demand, and promising guidance. Therefore, it is well-positioned to generate an incremental value for its shareholders.

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 363.60 (as of 17 March 2022), with a lower-double digit upside potential based on 6.93x Price/NTM Earnings (approx.) on FY22E 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 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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