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FTSE 100 falls with Royal Mail leading the way on government sale

Discussion in 'Market News' started by Lily, Oct 13, 2015.

  1. Lily

    Lily Forum Member

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    Investors unsettled by poor Chinese data, with miners among the fallers again

    Leading shares are on the wane for the second day running after last week’s surge.

    Worse than expected Chinese import figures cast further doubts about the strength of the world’s second largest economy, undermining commodity companies again.

    Clearly this removes any overhang issues, but we think that the bullish case for Royal Mail is still not clear cut. The company’s first quarter update in July reported a challenging revenue environment. Group revenue was flat year on year (full year 2015: 1%). Notably, letter revenue in its UKPIL [UK Parcels, International and Letters] division was down 4% with customers down-trading to cheaper mail products. UKPIL division parcel revenue growth (up 2%) lagged volumes (up 3%) due to a tough domestic pricing environment.

    Looking forward, Royal Mail has a new pay deal to negotiate with its tetchy union, and against the backdrop of a tightening logistics labour market. Ofcom, the regulator, is conducting a wide-ranging review of the regulation of Royal Mail and the market. Further out, we remain concerned that the company’s main pension scheme will require significantly higher cash service payments. Having said all this, Royal Mail’s valuation is attractive, trading on a calendar 2016 PE of 10 times versus the wider logistics sector on 14 times (a near 30% discount). The current dividend yield is 4.7%, twice covered and versus the FTSE 100 offering 3.7%. We maintain our hold recommendation and target of 500p.

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