Share tip of the week: profit from Royal Mail's strikes
By
Paul Hill Oct 16, 2009
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If ever there was a time for the private postal sector to pop the champagne corks, it was after Friday's vote by Royal Mail workers in favour of a series of national strikes in the run up to Christmas.
This latest action amounts to commercial suicide. With mountains of Christmas presents to deliver over the next three months, the dispute will prove a huge boon for rivals such as Business Post. Indeed, Royal Mail itself said that the decision "would drive away customers", while the British Chambers of Commerce described it as "akin to a death wish".
That said, the strike is not all good news for Business Post. Its rapidly expanding mail division – which collects and sorts around 15 million letters a day – would be hit because the state-owned Royal Mail still controls doorstop delivery.
But this model is unsustainable, and longer term I would expect the regulator, PostComm, to ensure Royal Mail's stranglehold over the "last mile" is removed. Once that happens, Business Post is well placed to benefit.
Business Post (LSE: BPG), tipped as a BUY by Seymour Pierce
In any case, Royal Mail's latest woes are just the icing on the cake. That's because Business Post is already Britain's largest independent parcel, mail, courier and pallet delivery organisation. It competes profitably with CityLink, DHL and TNT, and has been expanding its customer base as corporations have turned their back on ParcelForce.
Its mail division now has a 17% share of the market (up from 11% a year ago), and is the firm's biggest contributor to profits. What's more, 70% of its business is based on delivering statutory documents (such as bank statements) for the likes of Prudential, HBOS and Abbey. So it is less exposed than many other businesses to fluctuations in economic activity.
Another attraction is that the group has a sound balance sheet (which includes net cash of £9.5m at the end of March) and minimal capital-expenditure requirements. This should give it sufficient fire-power to maintain its 6% yield, even in tough times. There is an outside chance it could also become a target for a foreign buyer.
Operationally, the only concern has been its more cyclically exposed parcels division, which has seen revenues fall in the first half. That has reduced Business Post's total sales by 3%. This decrease has unsettled investors, yet overall performance is improving, with tight cost control showing up in rising profit margins. So as a whole the group is on track to hit its full year targets.
House broker Investec is forecasting 2009/2010 turnover and underlying earnings per share (EPS) of £384m and 21.8p respectively, rising to £402m and 23p a year later. With the stock trading on reasonable price/earnings (p/e) multiples of 13.7 and 13.0, I rate the shares as good value.
Things could still go wrong – for example, a protracted double-dip recession will hit volumes of the more discretionary mail, such as direct marketing material. But all the same, Business Post is gaining market share, and will continue to benefit from the ongoing deregulation of the UK postal sector. The shift towards e-commerce – goods being purchased online and delivered direct to the door – will help too.
Interims are due out on 18 November, by which time the company should also have changed its name to the UK Mail Group.
Recommendation: LONG-TERM BUY at 300p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
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