Having seen off the “spivs and speculators”, Royal Mail (RMG) shares are back close to where they started their controversial stockmarket journey in 2013.
It’s been particularly painful progress this year for a multitude of reasons, mainly due to the ever-present threat of industrial action on pay and pensions.
But there have been signs recently that Royal Mail, CEO Moya Greene and the company’s 100,000-plus army of posties are moving in the right direction.
Thanks to mediation talks between Royal Mail and the Communications Workers Union, the threat of a hugely damaging strike in the run-up to Christmas now appears to be over.
The parties have agreed to discuss proposals from mediator Professor Lynette Harris, who has recommended the introduction of a collective defined contribution pension scheme with a defined benefit element for all workers.
On wages and the working week, she has proposed a 2.6% pay rise from April 2017 followed by a 2% rise from next April.
A one-hour reduction to the working week – currently 39 hours – is conditional on delivery methods trials, automated hours data capture and later delivery times.
Investec Securities analyst Alex Paterson said in a note today that he expected higher productivity growth would be sufficient to offset the pay increases.
He added: “Royal Mail has the lowest margin by far of the listed European mail operators suggesting significant potential for margin expansion through such initiatives as parcels automation, which remains in its most formative stage.”
Paterson reiterates Investec’s ‘buy’ recommendation and target price of 500p. He also points out that Royal Mail trades at an enterprise value/EBITDA multiple of 4.8, compared with over 7 for European peers.
However, Liberum’s Gerald Khoo is less convinced and has retained his ‘sell’ recommendation and target price of 370p.
He said the pay increases were more moderate than feared, but that productivity was adverse rather than improving.
UBS analyst Dominic Edridge, who has a ‘neutral’ recommendation, is becoming more optimistic but says much work still needs to be done.
He added: “In an environment where on our current forecasts UK costs are flat to slightly up, growing revenue is going to be key for future profitability and one where cooperation would be a significant benefit.”
This week’s progress on mediation comes after better-than-expected half-year results helped push shares above the 400p barrier in recent days.
Revenue were up 2%, while underlying operating profit rose 7% as the overseas parcels operation GLS helped offset the flat sales performance and near-6% drop in profit at the UK business.
Hefty pension costs still tipped the company into an operating loss and the UK business into the red at the bottom line.
As we said last month, with the share price 9% lower at 405p: “Royal Mail shares are hardly expensive, are cheaper than many rivals and offer one of the most generous dividends around.
Contrarians could be richly rewarded if Royal Mail achieves a better than expected outcome with the unions than is currently factored into the share price.”
As always, Christmas will be the key to the second half performance, but, in the meantime, investors will be relieved that the company won’t be losing as much as £12 million per day through any industrial walkout.
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