Trying to work out the value of Royal Mail is a naturally imprecise science. However, there were enough international examples, plus previous privatisations, to make a reasonable guess as to what the government would do. We reprise our feature on the Royal Mail flotation, first published in July. (Sid's Back 26 July - 1 August).
The only problem with our previous analysis was the estimate that the government would issue 2bn shares, which turned out to be double the actual amount. That skewed our initial float price estimate considerably. Nevertheless, our 150p target price was proportionately correct because, with 1bn shares issued, we were very close to the official 295p midpoint of the valuation range.
The rest of the valuation metrics are broadly in line except that underlying earnings per share (EPS) now comes out at 30p a share, giving the same PE ratio of just over 10. The total enterprise value (EV) of £3.5bn (market capitalisation, plus debt, minus cash) gives the Royal Mail an EV to cash profits ratio of four. Both of those valuations compare well with Deutsche Post's valuation of a PE ratio of 13 and EV/cash profits of 6.2, while the average for the sector is a PE ratio of 19 and EV/Ebitda of 9.3, according to Bloomberg data, and none of these require adjustment. Overall, investors seem to be getting a reasonable deal and, unlike some poorly priced IPOs over the past few years, the Royal Mail is realistically valued.
Royal Mail financial results for the past six years
| Year to 31 Mar | Turnover (£bn) | Operating profit (£m) | Pre-tax profit (£m) | Free cash inflow |
|---|---|---|---|---|
| 2008 | 8.47 | -176 | 32 | -74 |
| 2009 | 8.65 | 75 | -42 | -476 |
| 2010 | 8.51 | -33 | -199 | -355 |
| 2011 | 8.41 | -30 | -118 | -200 |
| 2012 | 9.14 | 95 | 201 | 154 |
| 2013 | 9.27 | 363 | 324 | 334 |
| % change | 1.4 | 382 | 61 | 117 |
