Royal Mail Group is the UK and Ireland postal service with a capitalization of more than 4B GBP and more than 500 years of experience in delivering parcels and letter

The Company consists of two principal operations. Its United Kingdom-based operation includes Royal Mail and Parcelforce Worldwide (Royal Mail) and its international operation is General Logistics Systems (GLS).

GLS is one of the largest providers for e-commerce business in Europe and Canada, with a consistent growth in the last years.

Analysts have a consensus that it’s 58% higher than current share price

Why should you be interested in this company?

RMG has passed few difficult years with the letter business declining fast and it’s in the middle of restructuring after a long negotiation with its large workforce (more than 170k employees worldwide). Moreover, large investments were needed in order to support the growing Parcel business and increase automation.

Right now, positive signs are visible, the company not only was able to complete the negotiation with its Unions, but its business in UK is growing back, while GLS revenue is getting more and more important (now more than 32% of total revenue).

The latest results are also showing good trend with Free Cash Flow growing and Net Debt declining fast.

Below some factors that make RMG so interesting:

  • Their dominance in its segment
  • In a fast-growing industry, expected to grow 5-7% every year
    • E-commerce is here to stay with logistics providers to grow along
  • Saving program to start showing its result this year
  • Free Cash Flow already representing 15% of its capitalization
  • Net Debt already lower than 1 year Free Cash Flow
  • 25% share price decline in the last 6 months

My “Fab 4 “

  1. Free Cash Flow yield higher than 10%
    1. In the last fiscal year Free Cash Flow generated around 670M£ on a 4B£ capitalization (16,7%)
    2. Considering economies of scale and saving programs kicking in, I would not be surprised if FCF could reach to 1,2B£ à 30% of current capitalization
  2. Debt or Financial solidity
    1. As mentioned, Net Debt is decreasing and at the end of March 2021 it was just above 450M£
  3. Strong and trusted management
    1. In the previous years, the former German CEO had multiple clashes with unions and workforce. Even though he was the founder of GLS, he didn’t fit in the British culture.
    2. Current CEO (Simon Thompson, with a humble personality) had immediately achieved good results and he was able to close a 3 years negotiation with the Unions and focus on more productive tasks
  4. Margin of safety
    1. The latest share price decline (25% in few months) has created a good entry point with a nice margin of safety
    2. Analysts give a Target price of 658gbp, 58% higher than current prices

 

Risks

As in every investment, there are some risks associated. Here the main ones:

  • Brexit will not help logistics providers in the short terms (lack of track drivers, missing fuel…)
  • Inflation could erode margin quickly, considering that Net Profit is between 6-8% and personnel cost is the largest costs in its P&L
  • Logistics is a very competitive industry forcing companies to keep investing and improving services

 

Conclusion

Royal Mail is sound organization in a challenging but growing business with strong Free Cash Flow to guarantee a +5% Dividend.

Business will continue to grow in the next 5 years and synergies and economies of scale should accelerate profit and dividends with it.

Today Royal Mail Group has a capitalization just above 4B£ but it could be closer to 20B£ in 5 years’ time, if the current growth is kept.

My goal is to enjoy the dividends till 2025 while the shares move from 400gbx to 1600gbx (400% growth)

The road is long but I am confident that RMG will deliver.