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Deliverance

21 May 2015 By Robert Cole

The UK state may soon offload its remaining 30 percent stake in Royal Mail. The British general election result is the key reason why the government may accelerate the completion of the privatisation. The Exchequer would welcome the likely 1.5 billion pound proceeds. The company is also well placed and well priced for disposal.

Prime Minister David Cameron’s outright electoral success simplifies the political considerations considerably. His Conservatives have none of the ideological problems that would have stopped opposition Labour from completing the denationalisation. The exit of Vince Cable, a Liberal Democrat minister in the previous coalition government, makes it easier for the government to draw a veil over the pricing controversies that dogged the October 2013 IPO.

The path to a follow-on share offer – 18 months after the first round was sold at 34 percent below to the current share price – is also smoothed by Royal Mail’s financial results, published on May 21. The first set of full-year numbers for its first full year as a publicly listed company was pretty good. While revenue grew by just 1 percent in the 12 months to March 29, on management’s reckoning underlying pre-tax profit rose 6 percent.

Royal Mail has done well since the IPO. Most notably, it achieved what looks like lasting peace in its previously troubled industrial relations, although at the cost of an inflation-plus pay deal. Competition has also eased. Rivals City Link and Whistl have respectively left the market and retrenched.

Yet postal and package delivery is still low-or-no growth, and Royal Mail bears the high cost of a statutory obligation to deliver six days a week to virtually all UK addresses. The rivals’ troubles are a reminder that the business does not easily generate satisfactory returns.

Investors are optimistic. Thomson Reuters Eikon data puts Royal Mail stock on a forward earnings multiple of 18.4. That’s 15 percent ahead of Deutsche Post, the doyen of the European postal sector, although the British company’s valuation looks less stretched when its enterprise value is set against EBITDA.

The new government may take advantage of the share price cheerfulness and sell sooner rather than later.

 

 

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