The Royal Mail (LSE: RMG) share value soared round 50% in 2021, making it one of many high performers within the FTSE 100. This was partly because of the increase in on-line purchasing deliveries over the previous yr. As such, on the again of a wonderful 2021, can the shares rise additional in 2022, or will they see a decline?
Great latest efficiency
Within the first half of its FY21/22 monetary yr, Royal Mail’s efficiency has been wonderful. Certainly, whereas revenues solely rose 7% year-on-year, working earnings reached £311m. That is in comparison with an working lack of £20m the yr earlier than, which was attributable to restructuring fees and unfavourable impacts from the pandemic. As such, the corporate’s restoration has clearly been very sturdy.
This has additionally allowed it to return a big sum of money to shareholders, together with an interim dividend of 6.7p and a particular dividend of 20p per share. The agency additionally introduced a share buyback programme of £200m, demonstrating its sturdy monetary place. As such, the latest rise within the Royal Mail share value appears justified to me. The same efficiency subsequent yr might see it rise even additional.
Is the share value undervalued?
From a purely valuation perspective, the Royal Mail share value does look pretty low-cost. Certainly, the group reported fundamental earnings per share of 27p within the first half of the yr, and if it might probably carry out in an identical manner within the second half of the yr, this may give the shares a price-to-earnings ratio of beneath 10. This illustrates that they could be too low-cost and have area to rise in 2021.
It’s additionally necessary to think about GLS, Royal Mail’s subsidiary, when valuing the corporate. That is the corporate’s worldwide enterprise, which covers each North Europe and North America. Whereas GLS produces far much less income than Royal Mail, its profitability is across the identical. The corporate additionally estimates that GLS working earnings will complete round €500m in FY24/25. As such, this enterprise could possibly be a key driving issue for the Royal Mail share value.
Nonetheless, there are some elements which will maintain the shares again. For one, wage inflation is a really massive drawback for Royal Mail, as a result of round half the corporate’s working prices are employees prices. There are additionally some obstacles to its modernisation programme. This is because of stress from commerce unions, which have prior to now blocked Royal Mail from slicing prices. This included stopping the corporate from making any obligatory redundancies. These elements may even see working earnings lower over the following few years.
What am I doing?
Regardless of these dangers, I nonetheless imagine that the Royal Mail share value has upside potential heading into 2022. The pandemic appears to have quickened the transition into e-commerce, and this could profit Royal Mail and different supply corporations.
Regardless of the hurdles posed by commerce unions, a modernisation programme continues to be in course of. That is anticipated to result in round £100m in annual financial savings. This could assist offset any extra prices attributable to wage inflation. Due to this fact, whereas I don’t assume the corporate can replicate its 2021 efficiency, there nonetheless appears to be area to rise subsequent yr. Due to this fact, I’ll purchase some Royal Mail shares.
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Stuart Blair has no place in any of the shares talked about. The Motley Idiot UK has no place in any of the shares talked about. Views expressed on the businesses talked about on this article are these of the author and subsequently might differ from the official suggestions we make in our subscription companies similar to Share Advisor, Hidden Winners and Professional. Right here at The Motley Idiot we imagine that contemplating a various vary of insights makes us higher traders.