Royal Mail is something of a safe haven in these markets, with dependable if falling revenues from its letters business and a growing parcels side reliant on the increasing volumes of ecommerce. The industry indications are that e-retail growth should continue at about twice the rate of the high street, even if the competition from such as Amazon for that parcel business is growing.
Those 700,000 investors who bought the shares in the 2013 flotation will have seen a good gain on their investment. The shares were floated at 330p. They were above £5 last summer and rose 8½p to 510½p yesterday.
They benefited from what was widely seen as a let-off from Ofcom, the regulator, which started looking at whether to impose price controls last summer and decided in May not to do so. Royal Mail has released figures for the first quarter of its financial year that are solid if uninspiring, covering what is generally a quiet period.
The picture is muddied by the EU referendum campaign, which boosted the amount of political mail going out. Royal Mail expects the volume of letters delivered to fall by 4 per cent to 6 per cent a year. The actual number, if you take out those political mailings, was down by 4 per cent, so in line with expectations. The further difficulty is the low inflation environment, which limits the amount that the company can charge, and total revenues from letters were down by 3 per cent.
The UK parcels side showed an encouraging 2 per cent increase in revenues and volumes. The standout was its European parcels business.
The assumption must be that Royal Mail, by virtue of its substantial market share and ability to control costs, must be better placed than most to weather the competitive pressures in parcels, even as the letters market declines. The company’s often vexed industrial relations appear quiet at present, if the position on the pension fund, to be closed to new members by 2018, is as yet unresolved.
From an investment perspective, the rise in the share price makes the dividend yield, at 4.2 per cent, rather less attractive than it was. I would suggest existing investors continue to hold the shares, but I would not be buying at present.
MY ADVICE Hold
WHY Royal Mail looks as well placed as any in the competitive parcels market, but at this level the yield on the shares is less attractive
Dairy Crest Group
By the end of this financial year Dairy Crest will be reporting the first profits from its new baby powder operation from its Davidstow plant in north Cornwall. The company, best known for its Cathedral City cheese brand, has spent £45 million on the plant to make demineralised whey and a prebiotic called GOS, both by-products of cheese production.
The product is going into the baby formula made by Fonterra, its global partner, and sold in China, the biggest market. It is hard to assess how important this will be to Dairy Crest in the future but it is the reason I chose the shares as one of my tips for the year.
There was not a lot said about this in the latest trading update, understandably, but the first quarter to June 30 lived up to expectations, even if Cathedral City was lapping some difficult comparators last time.
All four brands are doing as well as they were this time last year, at least. The shares are just the sort to be hit in the recent market upheaval, a FTSE 250 stock with exposure to British consumer demand. Up 10½p at 582p, they sell on 16 times’ earnings. That multiple looks cheap.
MY ADVICE Buy
WHY Decline in shares looks overdone
Ricardo
Ricardo’s trading update yesterday was unscheduled but entirely understandable. The specialist engineer has seen its shares fall from above £9 earlier this year for no obvious reason except that they have followed the FTSE 250 down, especially since the referendum vote.
The company gets half its business from overseas and will benefit from the lower pound. It continues to add small acquisitions to increase the skills it can offer customers, the most recent being an Italian designer of motorcycles.
The contract to supply the engine for the new McLaren super-car is not in full swing and will add to profits in the current financial year and beyond. Profits for the year to the end of June will be in line with expectations. There is no reason why Britain’s exit from the EU, if and when that happens, will have any significant impact on the business. Some research funding from the EU has been confirmed and will be paid whatever. Further work is being gained, such as a £35 million contract to provide transmission systems to a large but unnamed luxury carmaker.
The benefits of an earlier acquisition in the rail industry will start to feed through to profits this year. Ricardo has tended to grow revenues organically by 7 per cent to 8 per cent a year and will continue to do so. So far, so reassuring. The shares, up 1p at 758 ½ p, trade on less than 15 times’ earnings, which historically is quite low. This looks like one of those cases where the market has misjudged the shares. Worth picking up at this level, then.
MY ADVICE Buy
WHY The present earnings multiple looks cheap
And finally...
For those who have followed the stock for a while and seen Petropavlovsk survive a near-death experience and a highly dilutive rescue rights issue, it is encouraging that the far eastern Russian goldminer is able to consider the odd deal again. Petro is looking at three transactions, a joint venture to build a plant to treat existing reserves and two purchases of gold assets in the region. Given its continuing high levels of debt, both are likely to involve the issue of shares and further dilution.
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