The Royal Mail published its first results since flotation early this morning, revealing a significant rise in operating profits which caused shares to shoot up 30p, or 5.63 per cent. However, Spooner (pictured) says that the rise in profitability was expected and the stock is now looking expensive.
"They were expected to be significantly better in terms of profitability because of cost-cutting and the parcel side of the business doing well," he said.
"Although the share price reaction may tell you it has come in at the top end."
Spooner says that the more significant detail in the reports could turn out to be the indication that the company had lost a handful of contracts because customers were concerned about the potential for union stoppages.
"They had pointed to one or two losses of contracts, which should highlight to people that moving forward there are competition concerns," he said.
Joe Rundle, head of trading at ETX Capital, also thinks this is a worry. He points out that the customer losses have come in the parcels division, which is core to the investment case for the company.
"Digging deeper into the statement, management has mentioned that the fear of strike action has led to a slowdown in the rate of business-customer acquisition in parcels – an indication that the perceived threat of strikes has naturally pushed customers to choose rivals," he said.
"This could weigh on the company’s performance so long as there’s the threat of industrial action in the pipeline."
The Royal Mail reported revenues were up 2 per cent on a like-for-like basis, driven by a 9 per cent rise in the parcels division. General Logistics Systems, its European delivery business, increased revenues by 6 per cent.
Operating profit of £283m was flattered by a £35m one-off tax credit, but was still substantially higher than the £94m reported for the same period last year.
There were sharp rises in operating margins and earnings per share, while free cash-flow fell as the company paid off short-term debts.
Source: FE Investegate
However, Spooner says that these numbers, while healthy, are not central to the investment case and says that the company’s figures have been steadily improving for some time.
"I wouldn’t concentrate on the results, which were pretty well flagged," he said. "The things to look at going forward are the parcel side of the business and, in the short-term, the unions."
Growth in the parcels business was strong, at 9 per cent, while there was a 4 per cent reduction in the letters and cards business.
Performance of business units
Source: FE Investegate
The company said this reduction was within its estimated range of 4 to 6 per cent, and down from 9 per cent last year. However, Rundle points out that this may have been aided by short-term factors.
"The company’s letters division benefits from communication by energy companies and the latest round of energy price hikes over the past few months," he said.
Both Rundle and Spooner say that the coming Christmas period is vital for the Royal Mail.
Rundle added: "The company is now entering one of its busiest periods of the year and could see a significant bump up in revenue growth during the period, depending on the performance of the seasonal parcel volumes."
Spooner points out that the period is likely to see an increase in the number of parcels sent, particularly those ordered online, but the decrease in the number of letters being delivered will also be felt through declining volumes of Christmas cards.
In any case, an uptick in volumes is likely to be priced in already, he says, so investors hoping for a short-term share price appreciation over the period could be disappointed.
However, he admits there is always the chance it will decide to update investors on trading volumes if they have been very high.
The cloud that is hanging over the period and the company’s future is the ongoing dispute with the unions. The latter have used the threat of industrial action over Christmas in the past.
"We are in a massively important period for them, I would guess if they are still in talks with the unions, they won’t strike over Christmas, so it looks as though they might get through Christmas without strikes," Spooner said.
Nevertheless, he points out that the threat of industrial action is already being felt through the loss of a small number of customers. The company will be hoping that the spread of share ownership through the workforce will be a strong motivation for it not to strike.
Many investors bought into the Royal Mail hoping for a dividend, including a number of high-profile managers FE Trustnet spoke to at the time.
The Royal Mail said it would pay out a total of £133m at the end of its financial year.
Justin Cooper, chief executive of Shareholder Solutions at Capita Asset Services, warns that some private shareholders may be disappointed with this figure, given the strong share price growth the company has seen.
"Shareholders who were hoping for a dividend didn't read the small print of the prospectus, which made clear they will have to wait until the full-year results, when the company expects to pay out £133m," he said.
"That is still on track for next year, but with the share price having roared ahead since the IPO, it means the Royal Mail will now provide a lower yield than quite a lot of the UK's largest companies."
Shortly after flotation, FE Trustnet spoke to a number of managers who said they were buying the company for the long-term.
Spooner says that The Share Centre won’t put a rating on the company until it enters the FTSE 100 at the next rebalancing.
