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11 October 2018

Can Royal Mail recover from the bottom of the class?

It was one of the most eagerly-anticipated London listings for decades – but on the fifth anniversary of its initial public offering (IPO), Royal Mail’s share price is just starting to recover after dipping below its issue price for the first time earlier this week.

City analysts downgraded the stock following a profit warning announcing that cost savings would be just £100m this year compared to the £230m expected.

Shares dipped as low as 324.7p on Tuesday 9th October, below its 330p issue price, but have since gained some ground. Its closing price on Wednesday 10th October 2018 was 345.3p.

James Rowbury, Investment Research Coordinator, said: “When Royal Mail first went private in 2013, the IPO was shrouded in controversy. The then-Shadow Business Secretary, Chuka Umunna, was calling for the deal to be halted as the shares were significantly undervalued. According to Umunna, the Government’s valuation did not account for Royal Mail’s significant property portfolio. Needless to say, the shares jumped 38% in their opening day of trading, illustrating a very different valuation from investors.

“With days to go before the IPO’s fifth anniversary, Royal Mail’s share price slumped below its prospectus price for the first time ever. Following a raft of analyst downgrades, the firm has wiped off around £1.3bn of its market cap since 28th September 2018.”

Other aspects of the 500-year-old business have improved and grown, according to its trading update of 1st October 2018. UK parcels revenue and volume were up 6% with both expected to exceed the previous year’s levels. GLS, the European logistics company owned by Royal Mail, has also increased its revenue up an estimated 9%. Royal Mail has also stated that due to a strong balance sheet and long-term cash generation, it can keep its commitment to a progressive dividend.

However, James said: “Looking ahead, the future of the company does not look so rosy; while logistics volumes are growing due to the rise of online sales, Royal Mail remains the least productive among its peers and price competition in the sector has severely squeezed its margins to unsustainable levels.”

Royal Mail was promoted back into the FTSE 100 earlier this year following its relegation into the FTSE 250 in September 2017. It remains to be seen whether it can hold onto its place when the next reshuffle is announced in December.

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Can Royal Mail recover from the bottom of the class?
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