Is Royal Mail delivering?

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Is Royal Mail delivering?

I’m a big fan of competition and the efficiencies and competitive pricing it brings. But a lot of what the Royal Mail does is what I would call a service. In fact, RM is a classic example: part commercial, part service. Transporting parcels is a business. Parcels are not an essential service, so it should be competitive. However, delivering letters to people, it could be argued, is still an essential service. There are certain things needing delivery, like legal documents that have to be originals. Which company would deliver to the arse-end of Britain without being compelled to? In reality our post is a load of direct mailing, or more correctly ‘recycling’, that effectively subsidises the postal service. On a personal note, I can’t believe First Class post is 50p. They should include a quick grope behind the bike sheds at that price!

I would have split off the commercial Parcel Force business from RM and sold that off, then merged the postal arm with the Post Office and Northern Rock to create a citizens’ bank, postal service and government document exchange (driving licenses, etc.), with branches all over.

However, the reality we have is that RM is now Royal Mail Group plc with seemingly less and less competition. City Link went under with spectacularly bad PR in December, announcing job losses that made Xmas the new C-word for many (like it makes any difference what day you lose your job unless you’re like 6 years old, or a gullible husband short of a virgin birth). TNT Post (aka Whistl) has now suspended doorstep deliveries pending a possibly less than daily door to door service, if any. RMG apparently stepped in at short notice.

Another nice little windfall is the low oil prices, which must be impacting positively on RMG’s profitability.

Chart 1 - RMG vs UKX 150519

October ’13 and the initial offering is well oversubscribed. A seemingly obvious choice for SIPPs and the inevitable stagging pushed the price up quickly, many taking advantage of gains from the 330p offer price. But then it doesn’t really get much higher following the initial rally, and after what could loosely be described as a head and shoulders (the head in Jan ’14), it trades right off to sit in the 400-450 range for 9 months until now. Quite obviously there’s a double bottom there – a pattern I’ve never really liked much, but seems to work. It’s helpful if the underlying index is supportive of a move, but the FTSE 100 has failed time and time again to break convincingly above the high of 15 years ago. In fact as you can see from the chart, the FTSE 100 (purple) has punctuated the over- and under-performance of RMG quite nicely. It looks poised to out-perform the market. (Incidentally, there is no point owning a stock that doesn’t!) A lot of upside potential.

Chart 2 - UKM - DX - RMG

In terms of competitors: you can also see that RMG is presently looking more attractive than its main competitors DX Group and UK Mail Group.

If we do see a move up from here, 600 is quite a reasonable target. There’s not really any resistance in between, and if RMG can’t make money in this very favourable environment of failing competitors, low interest rates and low oil prices, then it won’t be long before they’re being propped up by government funds or become victims of a hostile takeover.

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