If you have been in lockdown in the UK over the past few months, you will have seen a familiar scene – delivery vans scooting up and down streets at a frenetic pace. Very few of them have had Royal Mail on the side. When they have appeared, it has been to pick up letters from the red pillar boxes which have been a part of the scenery on British streets since the reign of Queen Victoria.
But if you thought that somehow the lockdown would provide more opportunity for Royal Mail (LSE:RMG), you may be in for a disappointment. Prices in Royal Mail shares have already factored in the gradual economic recovery in the lockdown from the COVID-19 pandemic. There is now avid speculation that Royal Mail is going to be broken up into different businesses. The move would reflect the reality on the ground that we are already seeing in our streets.
To sustain such valuations, Royal Mail would need to be sold off at some punchy prices. In a research note this month Credit Suisse said that Royal Mail’s GLS overseas parcels business would have to be sold off at the same valuation multiple as that of Deutsche Post DHL and that any buyer would also need to be factoring in profit margins from the parcels business to cap last year’s numbers.
Credit Suisse reckons that the growth in parcel delivery will need to offset the decline in letters by a considerable margin indeed.
Royal Mail: missing in action for investors?
I’ve not received a single parcel delivery during lockdown from Royal Mail couriers – and there have been many. It demonstrates the degree of competition within this market already from the likes of DPD and UPS, especially in the more lucrative, and growing, parcels segment.
Let’s look at Royal Mail shares from a shorter’s perspective: the stock has been heading steadily down since peaking on 11 May 2018 at GBX 631. Like many UK large caps, it has been clawing its way back from the lows achieved in the first week of April. But the overall trend has been down. Last year Royal Mail stock seemed to be happy trading around 225-235 which the market was comfortable with.
However, shorting of the stock by hedge funds has been mounting steadily from the end of February. This has shown no signs of changing direction. In particular, BlackRock Investment Management has been building a large short position during May and into June as we approach the latest set of Royal Mail results.
The problem with shorting Royal Mail right now is that it has already come off so far since the start of the pandemic, like other UK blue chip stocks. BlackRock seems convinced the market is now being over-optimistic. If the next set of numbers are anything short of bullish, we think investors will be disappointed and more will lose faith and vote with their feet.
Technically speaking Royal Mail shares, without the extra push from the pandemic, should be roughly where they are now, at GBX183. However this is a company that has just lost its CEO, Rico Back, who threw in the towel last month, and has struggled with modernisation and labour relations (e.g. spontaneous walk outs from postal works during the lockdown over the issue of inadequate PPE protection while sorting post). Costs are up – e.g. overtime, PPE expenditure and bills for agency workers drafted in to supplement missing staff). If we were about to see some good numbers, ask yourself, would Back have resigned?
Royal Mail is a stock we are looking at very closely in terms of a near term short, although it has lost a lot of the original bearish momentum that would have recommended it in 2019.