HindeSight Letters #87 April 2022 - SHARE OF THE MONTH
APRIL 2022 - ROYAL MAIL GROUP PLC - LSE:RMG
SHARE OF THE MONTH APRIL 2022
ROYAL MAIL GROUP PLC - LSE:RMG
Portfolio ADD, 20/04/2022, 338p
RMG has appeared twice in the HindeSight Portfolio over the last eight years, Feb 2nd 2015, ADD price 428p (HSL February 2015) and 9th March 2017, ADD price 401p, (HSL March 2017) subsequently both recording 18% gains before CLOSE alerts.
As you can imagine, I am often asked what I think of XYZ company, and the prospects for an investment. In the case of ADD selections for the HindeSight Portfolio, for large capitalised companies greater than £1bn in value, typically, I respond with, “depends on the current price”, which is usually misunderstood.
With that in mind, RMG is a perfect example. I would not be a long-term holder of RMG, it is unlikely to demonstrate long-term earnings growth. It delivers mail and parcels. The commitment to dividend distribution from earnings did see shareholders receive over 10% yields over the last 12 months, but the price has dropped 40% since that time.
In HSL June 2021, in the Insights section, I briefly mentioned RMG, as one of those companies that spend their time, at the bottom of the FTSE 100, or top of the FTSE 250, due to the changing market capitalisation, like Birmingham City, a yo-yo type football club. As of the March FTSE 100 review, RMG stayed in the top flight by a whisker, really only because Evraz and Polymetal were demoted, as a result of their Russian operations. Currently, RMG, sits in 115th place, (see HSL June 2021 for review rules), by size, and will not be so lucky next time, if nothing changes.
http://www.hindecapital.com/attachments/reports/full/453/ original/UK_Newsletter_June-2021__3.pdf
H1 2021-22 Group Financial Summary
Source: Royal Mail Group Analyst presentation
Returning £400 million to shareholders equally split between a share buyback and a special dividend.
Source: Hargreaves Lansdown
While I did see that RMG put up the price of 1st class stamps to 95p from 4th April, as you can see from the above financial summary, RMG’s revenue comes mostly from parcel deliveries, where it holds almost a third of the UK market share, naturally, with Amazon breathing down on it.
But, ultimately, the ADD notification, merely reflects that it is currently undervalued, and far more likely to see a mean reversion to fair value over the next nine months than further price erosion. It has the usual bad news about ‘pay discussions’ with its unions, but they may well be fully priced in at these levels. Earnings growth shouldn’t be discounted either, but with forward P/E ratios hovering around only 5X, the cheapness is there already.
Let’s see if RMG does better than Birmingham City over the next few months.