Welcome to the stock market 501-year-old Royal Mail.
And what a welcome! Shares have rocketed more than a third from the IPO price, giving it a market capitalisation that should push it straight into the FTSE 100 when the next index review is conducted in December.
Inevitably, the pricing right at the top of the IPO range, the huge demand, and the capping of allocations to the ordinary public has got the critics crying foul, accusing the government of pricing the offering too low. But we don’t do politics here at Alliance News, we prefer dealing with facts.
What are the prospects for this centuries-old business that delivers letters and parcels from the financial centre in London to the most isolated cottages in the farthest reaches of the British Isles?
Royal Mail’s possible privatisation has been mooted for many years as successive governments brought in management teams tasked with making the postal service a much more commercial enterprise. And the turnaround has been impressive, even if the company still has a highly unionised workforce that may still launch a strike within weeks, protesting at the privatisation.
Royal Mail’s most-recent annual figures showed operating profits more than doubled to GBP440 million in the year to end-March, as it benefited from a surge in parcel deliveries thanks to our growing passion for shopping online. Revenues from UK parcel deliveries rose 13%, accounting for nearly half of all its revenues. It also increased revenues from delivering letters by 3% as pricier postage stamps offset an 8% fall in deliveries.
Amid all the hype over the IPO, Royal Mail is a simple business. At its core, it employs tens of thousands of people to deliver letters and parcels across Britain. Its prospects are completely tied to that process, and growth looks limited, particularly as it is the incumbent with nowhere else it can deliver post in the UK.
Letter volumes will continue to fall, and stamp prices can only go up so much to offset that before the impact is negative. Reflecting that reality, the company is focusing on parcels, and volumes are likely to increase further in the short term as Web shopping continues to increase, but those growth rates will taper eventually.
Royal Mail is also no longer a monopoly. Competitors such as UKMail and TNT are going after the lucrative parcels business where they can, such as in major towns and cities, although Royal Mail has a pricing advantage thanks to its sheer scale, which allows it to negotiate better deals with the clients sending out those parcels.
Royal Mail’s new investors will enjoy the IPO froth, enjoy the big paper gains they’ve just made on their holdings, and if they hang around, enjoy the dividend payouts in the next few years. But the longer-term looks a lot more tricky for ancient Royal Mail, now waking up to the reality of having to make profits and returns in a competitive market with little room to grow.