Royal Mail came under pressure last week after the UK government sold part of its stake - 15% - for 500p a share.
But analysts at Berenberg reckon this disposal - and the expected sale of a third tranche in 90 days - could be a boost for the business. In a buy note with a 625p target, they said:
The sale by the government of a second, and soon a third, tranche of its holding in Royal Mail casts a technical shadow over the shares in the short term. In the medium term, however, the sale will eliminate a significant overhang, and in the longer term, more fundamentally, it is a wholly positive move for Royal Mail to be rid of the government as a major shareholder. With the civil servants no longer looking over its shoulder, Royal Mail can now turn its full attention to the needed restructuring (both operational and financial). The restructuring has thus far moved a little slowly, but with a dividend yield approaching 5% investors can console themselves quite reasonably that they are being paid to wait this one out. We stick with our buy rating.
Royal Mail will face a couple of unexpected headwinds this year and next as it works to improve its operating margin. This year it faces the impact of German minimum wages which could reduce [European subsidiary] GLS margins by 50-100 basis points; next year it expects to see an increase in national insurance contributions of up to £75m. But we expect that the long-term journey towards 8% operating margins will continue. As a reminder, the worst of its peers generated 8% last year, while the best peer generated 20%.
On the asset side, the one-acre site at Paddington was sold for £110m; we suggest a valuation for the eight acres at Mount Pleasant of £267m, and for the fourteen acres at Nine Elms we suggest £662m. On the liability side, in the year just reported, debt halved from £560m to £280m. Even in the absence of large property disposals, we expect Royal Mail to have little or no debt by 2018. Can this be the optimal capital structure?
Royal Mail shares - which had edged ahead earlier - have slipped 0.5p to 506.5p in a market very much under pressure on worries that the chances of a Greek default are rising.
