Shares rocketed by more than a third in early trading after the offering was seven times oversubscribed – many investors got a fraction of the number of shares they had bid for. The company was priced at the top end at 330p by the Government, but jumped to 450p earlier today. It has now settled around the 437p mark at the time of writing.
An FE Trustnet poll showed that more than one-third of the 2,221 respondents planned to buy into the stock.Commentators say the offering was "priced to go", suggesting that much investor interest was due to the hope of short-term profits rather than a longer term investment case.
However, Alastair Gunn, co-manager of the Jupiter High Income fund, says that he thinks the stock is a decent dividend-payer to hold for the long-term.
"I think if you had looked at it three or four years ago, the Royal Mail looked like history because it was dealing with a structural decline in mail," he said.
"There was growth coming through in the parcel business, but it was unable to generate profits because its cost of service was so high and the business had an £8bn pension deficit as well, and all the issues around funding that deficit going forward."
"Roll the cycle forward three years and it is making money, 80 per cent of its letter-processing business is automated and the Government has taken over the pension liability so the liability will effectively be capped. There are plans to automate more of the parcel-processing structure over time as well and there’s structural growth in parcels as an effect of the internet and e-commerce."
"The amount of competition in the domestic market has also reduced somewhat: a lot of people have had a go at it but haven’t really got anywhere."
Craig Jeruzal (pictured), investment analyst at SVM Asset Management, says that his firm is buying the stock for a number of its portfolios.
"Our view is that there’s a long-term fundamental investment case to be made for the Royal Mail," he said.
"Nobody is under any illusion about the challenges it faces, especially in the letter side of the business, and I don’t see any reason these would change soon."
"But in terms of using the data that they have to increase efficiency and putting more parcels through in the medium- to long-term, there are reasons to believe the business can grow the top line [revenues]." Jeruzal says when he met with the management of the company he was struck by the fact it saw the importance of the dividend to investors, meaning maintaining and growing that payout was a priority.
"I don’t think this is going to be a stock for growth investors, it’s going to be for income investors," he said.
One of the major risks that has concerned potential investors is the ongoing troubles with the unions, with 12 strikes since Easter. Jeruzal says he doubts this will be an ongoing problem.
"If you look at it historically, since Moya [Greene, chief executive] took over at the Royal Mail the relationship has been really good between management and staff, although there will always be a certain number of people in the unions who are against privatisation and so in favour of industrial action."
"In the longer term you need to be aware of it but I do not view it as a grave danger."
Gunn (pictured) thinks the issues will dissipate once the privatisation process is complete, although he recognises it is one of the reasons the stock has been priced lower than some people would have liked.
He points out that 20 days of strikes would wipe out most of the year’s profits.
"In a way, the unions have to face up to reality: you can only offer them a long-term future if the company actually makes a profit," he said. "I think the tension is about privatisation rather than unhappiness with management. One would hope it would calm down again post-float."
"It was the Labour Party that started the ball rolling in terms of 'attracting outside capital' as they put it," he added.
"If you see Labour shouting from the sidelines 'it’s underpriced', part of the reason is to take account of those risks."
Jeruzal agrees there were good reasons to price the stock so low.
"Clearly we think intrinsic value is greater than what’s being offered, but there are many reasons for that," he said.
"The Government was damned if they did and damned if they didn’t. Clearly you have to build in a comfort room for investors who are less used to investing in equities. It would be catastrophic if all these people lost 10 per cent right off."
One of the features of the company that has excited investors is its property in London with planning permission.
Chris Kitchenham, director at Walker Crips, says this is one of the reasons why his firm has been buying Royal Mail.
"The financials work well, the current pension deficit is parked with HM Treasury and expensive government debt is likely to be refinanced, leading to significant cost savings."
"In the longer term, there are possible value-unlocking opportunities in the freehold land portfolio, with three London sites, namely Mount Pleasant, Nine Elms and Paddington having pre-development work and planning consents applied for."
Many investors hope the company will be able to monetise these assets, although Jeruzal says management is wary on this matter.
"The company were quite keen to talk this down. They were saying it will be a nice add-on but is not central to the investment case," he said.
The high degree of retail investor demand for the shares saw platforms and websites crash this morning under the weight of business, and it is clear that there are plenty of investors who see this as more than a short-term opportunity.
"Across our dealing desks we have seen unprecedented demand for shares, with the private investor attracted by the long-term dividend stream and the more short-term investor seeing the opportunity to make a quick gain from the offering’s likely oversubscription," Kitchenham said.
