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Royal Mail Group: tipped to benefit from normalisation of European logistics


Armchair Trader Pick: Tactical Trading Portfolio

  • Royal Mail Group (LSE:RMG)
  • Sector: Industrials (Freight & Logistics)
  • Market cap: GBP 4.98bn
  • Entry price: 495p (17 December)
  • Target price: 600p
  • Stop loss: 10% (trailing)

Royal Mail Group (LSE:RMG) has turned into a profitable trade if you were in the stock a year ago when the shares were trading a smidgen above 300p. We went into the stock on 17 December at 495p. You would be tempted to think that much of the upside has been squeezed out of this share, but let’s take a look at some of the attractive aspects on offer here.

We are fans of the ‘in for free’ concept of Ian Lance, a fund manager with RWC Partners and co-manager of the Temple Bar Investment Trust. He continues to search for companies where he thinks the market has sold the stock down so far that the valuation makes no sense versus the components of the business, and where one part can be worth more than the valuation of the entire group.

He has twice cited Royal Mail Group as a candidate for this category of share. What is surprising is that the valuation of Royal Mail shares remains so mis-placed given its size. Lance has argued that just the Royal Mail’s European parcels business is worth more than the current market cap of the company. Royal Mail reckons that this GLS parcels business will make €500m of operating profits in 2023/4, which gives this business a valuation of around €5bn. It means the rest of the Royal Mail is technically valued at zero by the market, or ‘for free’ in Lance’s words.

We went to look at the numbers on Royal Mail given Lance’s assertions and are inclined to agree. In fact, it would have been nice to get into the stock when it was trading at just under 400p, but the shares have rallied back up again since mid-November.

Royal Mail looks in great health to us

Royal Mail looks to be in rude health indeed. Total revenues are up and operating profits are seeing a CAGR of 23.7% (net profit 20.8%). The balance sheet is also improving.

JP Morgan recently said it expected the current disruptions within European logistics to gradually normalise in 2022, and specifically pegged Royal Mail as a stock it expects to benefit from normalisation over the course of next year. It has rated Royal Mail as the top share to capitalise on this trend, ahead of other competitors like Maersk and Deutsche Post.

The renewed enthusiasm for the stock can be partly attributed to the company’s optimistic half year report issued 18 November. It announced H1 adjusted basic earnings per share of 30.3p versus 0.4p a year ago. It is expecting an adjusted operating profit of £500m for FY 2021-22. An interim dividend of 6.7p per share was confirmed, in line with policy. Some £400m in capital is being returned to shareholders with a £200m share buyback. A further £200m special dividend was also confirmed.

The 12 month forecast PE ratio on Royal Mail shares is 8, with a PEG of 3.9. We don’t expect the company to be as vulnerable to COVID over the next 12 months as it has been since the start of the pandemic. We are seeing plenty of investor enthusiasm for this share at the moment, and don’t see a 600p price target as being unreasonable in the circumstances.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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