In hindsight, the float price did look too cheap. The shares were offered up with a dividend yield just north of 6 per cent. That's a very fat yield for a FTSE 100 stock and the attractions of the float were evident by its massive oversubscription. The main reason for that undervaluation was the threat of industrial action - pension fund managers needed something to compensate for the spectre of powerful unions. And that something was a marked-down entry price.
Now Royal Mail is actually listed, things have changed. The strike threat appears to have receded. Speaking on the potential to conclude an agreement with unions at the recent results presentation, Royal Mail chief executive Moya Greene said she was, "very optimistic we will get there soon." And indeed just this week, Royal Mail announced an agreement in principle with the Commercial Workers Union (CWU) on pay and pensions among other things. The agreement still needs to be balloted by the union's membership. But CWU has confirmed there will be no disruption from strikes while the proposal goes through the ratification process, which means the key Christmas delivery period looks safe.
An industry insider told this writer a few weeks ago that they believe we have seen the last of industrial action at Royal Mail. This raises the intriguing possibility that the IPO itself taken some of the heat out of the unionised workforce's gripes. The workforce was offered 10 per cent of the company, or 725 shares each, completely free. More than 99 per cent of Royal Mail union members took up the share offer, despite the fact that they were against the privatisation.
At the current share price, that holding is worth more than £4,200. That is quite a considerable amount compared to an average postman's salary of around £21,000 a year, although the holding can't be sold for three years. Now employees are also shareholders, they may have a keener interest in keeping that share price as high as possible.
If the strike threat really does prove to be a storm in a tea cup, then fund managers will be toasting the unions for giving them an excuse to get in so cheap. As for where the shares go from here, quick comparison with peer Deutsche Post suggests there could still be a little more upside. Taking consensus figures for next year's earnings, Royal Mail trades on a PE ratio of 13 times. That's a shade cheaper than Deutsche Post on 14 times (using Credit Suisse forecasts). What's more, Deutsche Post's dividend yield is 3 per cent whilst Royal Mail's is 4 per cent.
With a confident set of maiden results under its belt - impressive cost cutting led analysts to upgrade earnings forecasts - and better relations with the workforce, breaking through the £6 mark looks a realistic prospect for the shares. Putting them on the same PE as Deutsche Post would give a share price of 645p - tantalisingly close to double the float price.
