In the short run, the Post Office has a lot of weighing machines but in the long run it’s more of a voting machine (aka the Communication Workers Union). Not sure where we’re going with that but anyway, the long-term takeaway here is that Vince Cable’s been proved right yet again.
Royal Mail’s umpteenth grim update of its seven-year listed life has sent shares sliding to a record low. Remember when everyone kicked Mr Cable, then business secretary, for selling the crown jewels too cheaply after Royal Mail was floated at 330p and had a first day pop to 455p? There was a Select Committee hearing and a National Audit Office review, both of which divined a general consensus among “right-thinking people” that Royal Mail had been undersold. The CWU general secretary called on Mr Cable to resign, saying it was a nonsense to suggest labour disputes needed to be baked into Royal Mail’s valuation. The stock’s now down nearly 50 per cent from IPO and on Tuesday the CWU announced its third industrial action ballot since August. So it goes.
Here’s Liberum Capital:
Trading for the peak Christmas period, which coincided with the election, appears to have been broadly in line. After adjusting for a working day count distortion, UKPIL revenue was +2.1% YoY for the 9-month period, with Parcels revenue +4.9% and Letters revenue down just 0.4%. However, Letters volumes (ex-elections) fell by 8% YoY. GLS revenue was +7.3% ex-acquisitions.
Management noted some impact on Parcels volumes at Christmas as customers took precautionary action against potential industrial action at Royal Mail. There also appears to have been a marginal slowdown in the 9-month figures relative to H1 in all KPI lines except Letters revenue, which would have been boosted by the election. For example, Parcels volumes were +5% in H1 vs. +4% at the 9-month stage. Given the heavy rounding of growth rates, caution should be exercised in interpolating the figures to infer a Q3 performance, but the implication is a slowdown vs. H1.
Guidance for the current year (March 2020E) is unchanged, with management expecting Group Operating Profit (before IFRS 16) of £300m-£340m. However, management continues to describe a challenging outlook for next year (March 2021E) with Letters volumes guidance cut by 1pt (to down 7-9%), an increased likelihood of a UKPIL loss and the medium-term 2024 targets at risk without significant progress in implementing the strategy. The poor relationship with the CWU union, which is moving ahead with a strike ballot, bodes ill for both business as usual productivity improvements and reaping the benefits of the medium-term strategy. We see the balance of risks to consensus estimates beyond the current year being on the downside, with a potential crystallisation our fears that last year’s Letters price hike would eventually accelerate the structural decline in volumes and poor progress on productivity likely with the union relationship having broken down.
On our current published forecasts, Royal Mail trades on a March 2020E P/E of 10.3x and EV/EBITDA of 3.6x (rising to a March 2021E P/E of 13.4x and EV/EBITDA of 3.8x). While these may not appear to be demanding multiples at first glance, and the dividend yield of 7.9% is notionally supportive, we believe the valuation does not adequately reflect the significant structural challenges faced by the group. Management’s strategy has the potential to deliver a turnaround in margins, but comes with material execution risk, needs a benign economic environment and trade union co-operation. At a minimum, the latter does not appear to be forthcoming. Our recommendation remains SELL with a 175p target price, based on our DCF valuation.
And Cantor:
The Group needs to press on with its restructuring and transformation plan but mentions a lack of agreement with the main union, the CWU. The other key issue, in our view, is the future of RMG’s fast-growing international parcels business GLS. We calculate there is considerable value in selling this unit, and few current synergies with the core business. If the UK transformation plan does not progress rapidly, the question of a break-up will rise up the agenda … The stock has been weak and, assuming full year estimates and dividend payments can be achieved, we are approaching parity with the forward PE at 8.3x and yield at 7.9%. This should provide a temporary floor for the stock but plenty of questions remain on the ability of RMG to adapt to the acute pressures on its letters business, and changing patterns of delivery for parcels.
As a footnote to the theme, Michael Fallon — Minister of State for Business when Royal Mail was floated — has been appointed as a noddy at Iraq oil explorer Genel Energy. It’s a predictable return to corporate life for Sir Michael, who was once on the board at Terry Smith’s Tullet Prebon and ran several businesses owned by Dragons’ Den person Duncan Bannatyne. What he knows of Kurdistan is yet to be determined, though his year as UK energy minister and his stint as defence secretary between 2014 and a murky-circumstances resignation in 2017 look like relevant experience.
NMC Health is surging nearly 2 per cent at pixel after the FT’s man in Dubai reported overnight that founder BR Shetty “is looking to buy out his Emirati partners and return to an ‘active leadership position’ at the embattled hospital group.”
[According to people briefed on his plans] the 77-year-old Indian-born entrepreneur BR Shetty is conducting an operational review of NMC ahead of formal talks to explore various options with shareholders and regulators.
And also:
Private equity firms, including Apollo, have previously considered taking a stake in NMC, according to two people familiar with the situation. Apollo declined to comment.
You’ll remember we kicked around the NMC crisis playbook in Wednesday’s session, with particular reference to the Bin Butti pledge overhang that a partner buyout might help solve. We’ve not much new to add other than to observe that, without clarity on Mr Shetty’s wherewithal and ability to attract backing, the market’s wariness looks rational.
Full-year results from Beazley, the Lloyd’s insurer, beat expectations by miles. It’s been a tough few years for Beazley due to catastrophe losses and social inflation, with is the industry term for the steady creep higher in compensation payments, litigation costs and the like. What we get today are targets hit, reserve surplus getting rebuilt and guidance for a return to double-digit top line growth, all of which is a relief. Here’s a summary from Goldman Sachs:
Profit before tax beat company-collected consensus by 21%, driven by a slightly better than expected combined ratio (100% vs consensus of 101%) and a stronger than expected investment return (4.8% vs. consensus of 4.7%). The 2nd interim dividend of 8.2p was in line with expectations (cons. 8.2p per share). Surplus capital of 22% of ECR remained within the upper part of the target range of 15%-25% (2018: 23%). Reserve releases were modest at only 0.4% of NEP and the company has indicated that they will remain subdued in 2020, but Beazley has increased its reserve margin close to 6.8%, which is close to the middle of its target range of 5%-10%. Rate increased by 6% over the year, which is in line with rate increases reported at 9M19. Premium growth was 15%, up from 12% at 9M19.
GS view: Overall we view this as good set of results from Beazley, with strong growth, good margins and an increase in the reserve margin toward the middle of the target range of 5%-10%. The latter is likely to have been enabled by a relatively benign short tail loss environment in Q4 and a lack of major adverse development in US casualty, which we believe should support investor confidence in the stock. However, the indication that reserve releases will remain subdued in 2020 could lead to some pressure on consensus earnings expectations. On balance, the positives outweigh the negatives,
Tate & Lyle’s third-quarter trading statement is in line and full-year guidance is unchanged. Food & Beverage Solutions. which is about 45 per cent of T&L’s profit, showed a bit of a slowdown in Asia Pac but the more mature North American and European markets were fine. The commodity side of the business is patchy as always — sweeteners down, industrial starches still soft — but New year pricing rounds in North American Sweeteners are reported to be nearing completion with margins “broadly in line” with last year.
Not enough, says Investec Securities:
With the sharp move in the share price, we think the market needed to see more. We move to Sell with unchanged estimates and TP. We continue to think the biggest impact on the share price will be the execution of a successful Ingredients deal, as the company is too exposed to Primary Products, which drag on group growth.
Tate now trades on 14.5x CY20E PE, a premium to nearest peer Ingredion and to higher growth mid-cap Consumer stocks such as C&C. This premium is unwarranted in our view, absent a deal. We move to Sell on valuation grounds, with a CY20E PE of 13.8x implied by our 760p target; this would still be at a premium to Ingredion. We await a better entry point or news of a deal.
What else? Decent numbers from Arcelor. … Deutsche Bank welcomes Capital Group as a 3.1 per cent shareholder. … “PartnerRe [is] up for sale as Exor cools on sector” reports Insurance Insider. … InBev confirms CFO exit. .. Amber Rudd, former home secretary and sister of arch Finsbury spinner Roland, joins rival flack shop Teneo Blue Rubicon. … And Guy Hands says money is ruining private equity.
Anything we’re forgetting? Reader, please let us know below.
