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Royal Mail not a buy as competition concerns bite
by Eleanor Lawrie on May 22, 2014 at 14:37
Mark Boucher, head of UK equities at Smith & Williamson, has argued Royal Mail is not a buy as the current share price does not compensate for competition concerns.
At 14:20 Royal Mail's share price was down 6%, trading at 537.65 pence following its annual results, in which the postal service reported a £27 million rise in operating profit to £430 million after costs for the year to the end of March. Revenue grew 2%, over the period, in line with expectations.
Commenting on the results, Royal Mail's chief executive Moya Greene warned the company was 'facing a couple of headwinds', in the form of rival companies offering direct delivery.
'The competitive environment on the parcels side is more intense. We are taking steps to remain the leader in this growing market,' she said.
The company has called on Ofcom to look into competition amongst delivery services, complaining that its rivals are cherry picking the most lucrative regions to deliver to, leaving Royal Mail with the regional areas that it is obliged to cater for.
Royal Mail warned that it would not be able to achieve its revenue target of 5-10% if this is not addressed, although Ofcom has suggested the postal service should 'improve efficiency' to combat competition threats.
Boucher says these challenges prevent him from buying into the stock, even at lower levels.
'Royal Mail have grown revenues very strongly over the last few years and we expect that to continue but it's going to be tough for them to carry on cutting costs. We continue to think it is overvalued and there are a lot of risks remaining in the business. Plus they may release another tranche of shares before the next election, which could dampen the share price,' he said.
'I would like to see Royal Mail under £5 before we think about buying it. It's not a business without risk, and I think there are more attractive businesses out there.'
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