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The Royal Mail Has Made Some Improvements, But Not Enough To Justify Its Valuation (OTCMKTS:ROYMY)

In the past several months, the Royal Mail (OTCPK:ROYMY, OTCPK:ROYMF) has nearly doubled its share price. In the same time, the company’s fundamental situation has changed little – despite a few bright spots – which suggest that the company has room for further downside.

Royal Mail Coronavirus Covid-19 impact

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Annual Report

The company’s revenue of £10.84 billion, was up 2.4% year over year. Earnings per share declined from 17.5 to 16.1 pence per share. Royal Mail took on a significant amount of debt, increasing to £1.687 billion, along with a significantly higher load of lease liabilities. The company does not expect to pay a dividend until the fiscal year 2021-22.

Going forward the company sees a reduction in CAPEX of £300 million over the next two years, as well as £120 million in savings from management layoffs.

COVID-19 and Union Discussions

The Royal Mail’s quarterly volume update showed a 38 percent year over year increase in parcel volumes. Its overseas GLS segment saw 22% growth. These numbers are largely driven by business to consumer growth, as a result of the pandemic. In response to this growth, the Royal Mail is creating new parcel sorting facilities, which should help improve distribution.

The company is currently in discussions with its union, the CWU, which have yet to be concluded. According to a union member, the discussions are expected to lead to job cuts. These discussions may have significant ramifications for the company, yet to be seen.

Valuation

The Royal Mail’s stock has risen significantly over the past few months. The company currently trades at a price to earnings ratio of 13.91, which is significantly higher than its P/E earlier this year in the mid 4s. The company’s shares would usually sport a handsome dividend, but as a result of COVID, this has gone away for at least another year. Considering this, and the continued prevalence of competitors likewise expanding their delivery services, the Royal Mail seems fully valued at this point.

Conclusion

The company has made improvements, but much uncertainty remains. The large layoffs can be expected to reduce costs, but it is uncertain how they will affect the company’s ongoing pivot towards more parcel delivery. The company’s suspended dividend also takes away a significant incentive for investment. In total, with its shares priced as they are, there is not enough upside potential to justify investment in the Royal Mail under this environment. Furthermore, should any economic uncertainty or new competitive developments occur, the Royal Mail may face some decent downside to its shares.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is for informational purposes only and should not be regarded as investment advice. This article should not be the sole basis for a financial decision, including the purchase or sale of stock. Any personal financial decision should be made on the basis of your own research and consideration of your unique financial goals and investing ideals.

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