Should investors start grabbing up shares in Royal Mail?

As a British institution, they are revered in many quarters, but starting from tomorrow, Royal Mail will be privately-owned for the first time. Privatization of the company is seen as essential by the government to try and raise funds to help reduce the need for making cuts elsewhere, but could the delivery firm follow in the footsteps of BT and British Gas (now trading as Centrica)?

A pigeon flies past a Royal Mail post box outside Charing Cross station in central London

 

 

 

 

 

 

 

 

 

A lot depends on how well the first few days of trading go, but early signs have been encouraging as the pre-flotation price per share moved above the 400p mark. This suggests that demand is high for shares in the company who posted a profit in excess of £400m in the year ending March 31. At first glance, it might seem that buying into Royal Mail is worthwhile.

Fierce competition

Despite achieving some success, especially in the crowded parcel delivery market, Royal Mail faces a big fight to try and become the top dog in their sector. The likes of UPS and DHL were among the first to take advantage of the boom in online retail, making significant profit from the increase in the number of packages being delivered to online shoppers; Royal Mail need to at least be competitive.

Something else that any potential new shareholders may need to be wary of is the fall in demand for letter delivery. Once the cornerstone of Royal Mail’s entire business model, many people have resorted to sending emails instead of posting a letter, something which has eaten into their profit margins over the past decade or so.

Undervalued

The initial starting price for Royal Mail was supposed to be in the region of 260p-330p, although a surge in demand has driven this upward. Nonetheless, some experts believe that in setting the price, the government have underestimated how much Royal Mail is actually worth.

Joshua Raymond, chief marketing strategist at cityindex.co.uk commented about the early signs for Royal Mail, he struck the following upbeat note

“Whether or not the government manages to sell at the top of its guidance range remains a bit of a lottery considering the Royal Mail is no ordinary company, it’s a British Institution with politics at play and the public has a chance to invest. Nevertheless, the early signs thus far are encouraging with just a day left to go.”

John has been a financial journalist for more than 10 years, working most recently as a senior stocks analyst.

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