AS THE research blackout for those connected to the Royal Mail flotation came to an end yesterday, analysts were quick to prove they’d been using the weeks since its listing wisely.
Banks rushed to get notes out as their investment banking colleagues faced a group of select committee MPs who’d clearly already made up their minds about the pricing.
UBS was first out of the blocks with a sell rating, saying market expectations for margins were just too high. Its analysts might be right. While results in the past few years under Moya Greene have been impressive, it’s easy to forget that Royal Mail only turned a profit for the first time last year. A huge amount of emphasis has now been put on the growth potential in its parcel business, an area that rival UK Mail proved yesterday can certainly be lucrative. But there are big differences between the firms. Shares in UK Mail, which makes 43 per cent of revenues from parcels, shot up six per cent as a rise in parcel volumes offset its weaker mail unit. This is a competitive market, and one that is by no means Royal Mail’s for the taking. But there’s a bigger problem looming. Though headcount at Royal Mail has been falling by a steady 2.6 per cent per year since 2006, this is unlikely to continue as management balance potential strikes with investor concerns. In the meantime, UK Mail is spending £20m this year and next on automating its parcel business, which will go live in early 2015 – a move it says should yield a “double digit net return” on its investment. It’s very hard to see Royal Mail doing the same. There’s now little doubt that shares were undervalued at flotation. But the market has sent them high enough – it was about time someone delivered a reality check.