The Government floated 60 per cent of Royal Mail Group in October 2013 at 330p a share, valuing the business at £3.3bn.
However, several investment banks at the time made estimated valuations up to £1.5bn higher, causing huge controversy that the shares were undervalued.
The stock soared at listing, closing more than a third higher than its initial asking price, partly on the euphoria generated by the widely held belief that the shares were sold off too cheap.
According to FE Analytics, where data starts from the close of its first day’s trading, it soared a further 35 per cent following its frantic debut.
However it has been on a downward trend since the start of the year and is down 11.54 per cent since first day’s close. By comparison the FTSE All Share has gained 4.69 per cent over the same period.
Performance of stock and index since Oct 2013
Source: FE Analytics
Headwinds have abounded including a looming secular decline in its core business – letters – the threat of industrial action following its majority privatisation and a lawsuit against its European parcels operation under French competition laws.
Graham Spooner (pictured), an analyst at The Share Centre, says Royal Mail’s woes are still looking unresolved and that its share price could be set for further falls.
“Investors should probably stay on the side lines for a while. It has fallen a long way but don’t forget that the share price got a bit carried away when it came to the market a year ago. There is pressure on margins,” he said.“A year ago investors were getting excited about growing its parcels business and internet shopping but also its property portfolio. Competition in the parcels business has been growing and there has been growing awareness of this.”
“There is quite a diverse range of opinions among analysts as to whether there is some value to be had and one or two have been upgrading it on this. It does still have a reasonable cash flow and property assets but there is also plenty of negative things about it.”
Spooner says he is particularly concerned about growing competition in their sector.
“Their last update highlighted that even parcels have been pressurised plus they have this investigation going on in France and of course the letters business which I wouldn’t say is in terminal decline but definitely in gradual decline. Recent updates from the company have suggested that this is starting to affect them.”
However, he says clarity on the implications of French legal action could trigger a buy signal.
The stock is not held by any managers within the IMA or Association of Investment Companies universes as a top ten holding.
However, star manager Neil Woodford is one current holder of Royal Mail.The stock represents 1.48 per cent of his £3bn CF Woodford Equity Income fund, having bought a position in July.
A spokesman for Woodford said at the time of the purchase that the stock’s re-rating had made an attractive entry point following its initial jump.
“Since its IPO last year, the shares initially performed very strongly but have since come back to more attractive territory. This is fundamentally a very attractive, cash generative business. It has its challenges, not least the competitive threat in profitable, densely populated areas,” he said.
“But it has its opportunities too, such as slowly working to bring its cost base into line with its competitors. Royal Mail has an operating margin of 4.6 per cent compared to 8-10 per cent for most of its peers.”
“We have been impressed by the management team and believe it is well-placed to capitalise on the long-term opportunity to deliver a better service to its customers and generate sustainable shareholder value.”
Since Woodford revealed that he had bought Royal Mail his fund has returned 3.69 per cent despite the stock losing 6.07 per cent. The FTSE All Share is down 1.51 per cent over the same period.
Performance of fund, sector and index since 31 July 2014
Source: FE Analytics
George Godber, manager of the Miton UK Value Opportunities fund, bought a position in Royal Mail back in February but has since sold his holding following its decline.
He says he is looking to buy back a positon, although is waiting for further clarity on its numerous headwinds.
“You have got an undervalued balance sheet and cash generative business, part of which will be a very significant yield growerm but I am waiting for more stability in the forecasts,” he said.
“The recent downgrades have been very severe and to put it into context it started the year at 45 pence [earnings per share] and has gone to 33p. There are not that many companies that have had that sort of scale of downgrades.”
“Fundamentally I do thoroughly believe it is a very undervalued and cash-generative business. ”
“However, clearly they have learn to be better at guiding the market and we need more insight from the regulator about what their plans are, particularly with regards to TNT who are quite unfairly taking great chunks of the business. That is at odds with protection of the universal service.”
