Royal Mail shares closed below 400p on Monday for the first time since they floated in October last year, and there has been no recovery in early trading.
They are currently down 1.2p at 397.2p, although still well above the 330p flotation price which led to criticism the company had been sold off too cheaply by the government.
And a note from Shore Capital repeats a buy recommendation on the business, ahead of interim figures due on 19 November. Analyst Robin Speakman said:
The company, judging by the weakness in its share price, is about to end a most difficult trading period. Looking at the first quarter report from July (detailing a better performance in mail activities then initially expected, a positive performance in European parcels from GLS, but challenging conditions in UK parcels with competitive forces strong) evidence from sector peers suggests that conditions significantly worsened through August and September.
Certainly, mail competition appears to have stepped up with TNT continuing its city by city roll out and the UK Parliament signalling a new formal investigation into the sustainability of the universal postal service (as it is currently constituted). Parcels also look challenging with direct delivery from B2B and B2C through controlled networks continuing to increase. In Europe, weak economies now appear to be biting volumes with regulatory concerns in France also becoming more acute.
Are the above factors a threat to forecasts for the current year and the dividend therefore? We observe that Royal Mail's model is highly leveraged with a fixed cost base in the short term and if conditions have worsened, there is likely to be a noticeable leveraged impact. The business is seasonally weighted to the second half period covering Christmas of course, so much depends on what happens in the next several weeks leading up to the peak period.
We believe that investors should really focus upon the longer term, however, on the potential to achieve industry standard margins some 100 basis points above current achieved levels at 8.0% plus, with an over capitalised asset base. We believe that our dividend forecasts are likely to be safe, well covered by the company's cash resources and reflecting the longer term outlook and likely ability of Royal Mail to flex its market position in the UK. The shares now yield 5.0% on a 20.0p dividend and we expect this level to continue to grow. Forecast reductions may ensue for the current year, requiring a further accelerated response on the cost base, but we look to longer term value leveraging the balance sheet. We retain a buy stance.
