In this week’s market report Oliver Phillips talks about Royal Mail…
In the UK, the FTSE 100 index rose 0.2% to 6,596.4. Having initially lost ground during the first half of last week, the market was boosted by the US Federal Reserve’s surprise decision to maintain its $85 billion-per-month quantitative easing program for the time being.
Stocks in focus: Royal Mail
What does it do?
Royal Mail is the designated universal service provider of mail services in the UK. It has a mandate to provide a fixed price, six days a week letter service to over 29 million addresses and presently delivers approximately 99% of UK letter mail and 36% of parcels (by revenue).
Why is it in the news?
The UK government recently announced its intention to float Royal Mail on the stock exchange. At least 41% of the shares are expected to be sold and initial estimates value the company at around £3bn, which would make it the largest privatisation since British Rail in 1993. With letter volumes in decline, Royal Mail’s prospects for growth hinge on its ability to take advantage of the buoyant parcel market, which is being supported by the growth of internet retailing. A major transformational programme has helped modernise the business and increase both profitability and cash flow, but it remains to be seen whether it can compete effectively with rivals that can cherry pick lucrative urban areas without being obliged to deliver everywhere in the UK.
Points of View: Domestic Bliss?
Evidence of a UK economic recovery continues to mount for the time being. As one might expect, this has proved a very positive backdrop for UK consumer oriented stocks and investors in the sector are now left to consider whether this recent outperformance can be maintained. On the one hand, many retail companies have recently warned of caution, citing that underlying consumer confidence remains weak and that declining real earnings are hindering any improvement in the UK economy from feeding through to the consumer pocket. On the other hand, optimistic commentators suggest consumer debt reduction is levelling off and that this will release more money to flow back into the consumer economy.