This morning the full-year results for Royal Mail (LSE:RMG) were released. We’ve been a fan of the company in recent months, with the sliding share price offering good value for long-term buyers in our opinion. With Royal Mail shares down another 9% today to 311p, here’s why we would be averaging in at this level.
Concerns from the report
Before we get into the reasons why we like Royal Mail shares at current levels, let’s run through why the price has slumped. The full-year report saw revenue actually grow modestly by 0.6%, but profit before tax took a hit by 8.8% versus the prior year.
The major point of concern was that the company felt the pinch from Omicron and had tight labour shortages due to self-isolation requirements. This hindered the financial results. To some extent, even though this issue is largely solved for the upcoming year, another Covid-19 outbreak can’t be ruled out.
Further, investors were concerned that Royal Mail performance was actually worse than the group figures, as GLS outperformed. For example, GLS revenue was up 4.4%, with Royal Mail down 1.6%, averaging out at a growth of 0.6%. On the one hand it’s good that the business is diversified, but on the other the performance of Royal Mail in the UK isn’t where it needs to be.
Why we still like Royal Mail shares
Despite the issues mentioned in the report, we hold to our view that we feel Royal Mail shares are undervalued at circa 300p. It currently has a price-to-earnings ratio of 5.45, making it one of the lowest in the FTSE 100. At a time when big tech and other sectors are coming under pressure for high valuations, we think it’s the opposite case for Royal Mail.
We’re also of the opinion that we won’t see Covid-19 rear it’s head again (famous last words…). As a result, we don’t see pressure on the postal workforce in the same way as the past year. We also don’t think that this move out fo the pandemic will overly hinder the booming pandemic parcel business.
In the latest report, Royal Mail noted that “domestic parcel volume (ex. international) up 31% vs. pre-pandemic period (2019-20); and down 7% year-on-year due to normalisation post lockdown restrictions.” Overall, the company is still experiencing long-term growth in parcel volume, which we think puts it in a good position with higher competition going forward.
Finally, we like Royal Mail shares due to the dividend yield. It sits at 5.84% at the moment, with strong cash flow generation noted in the full-year results. So for income investors out there, this looks an attractive way to try and offset erosion from high inflation on excess cash holdings.