Back in July as the government announced plans to float the Royal Mail, I laid out ten reasons why I think this business was not an attractive proposition. There are deep-seated issues here, not least of which are industrial relations and competition. And I can’t see why you would want to hold this stock for the long term.
Nonetheless, I did say I’d look at the prospectus and make my mind up nearer the time. In fact, I predicted that I may well “invest for a quick turn”.
And that’s precisely what I’m doing. Today I’ll explain why there could be a quick 40% return on the cards here (no matter how ugly this company looks).
Five reasons for a Royal Mail fire sale
This morning on Radio 4, shadow business secretary Chuka Umunna called the Royal Mail sell off “a dream bonanza for City speculators!” And he might be right. Because it looks like the Royal Mail is being sold off for a song. Analysts at Panmure Gordon said the company was worth up to £4.5bn — well in excess of the current upper valuation of £3.3bn for this float. Others are predicting the stock will rise by some 40% by the end of next week.
I can see five reasons why the Royal Mail is being hived off on the cheap. They’re not necessarily good reasons, but they’re reasons nonetheless.
First, and foremost of course, this isn’t the government’s asset, as such. It’s the nation’s property. And what a fantastic ruse that is. Sell the nation back something they already own! Of course, those that don’t have the cash to partake in the offer will lose their stake. And many will argue that this is wrong; but the key point is, it doesn’t exactly make the government all that fussed about achieving the best price for the sale. As far as they’re concerned, any money raised is a freebie.
And anyway, the second reason they’re not that bothered is that at this stage, they’re only selling half the business. That means they’ll be left holding the other half as a liquid asset…. they can always bail out of this investment at the full market rate as and when they want the cash.
But it still doesn’t add up does it? I mean, surely they’d still want to rake in as much as they can. If, as some City analysts suspect, the shares run straight to a 40% premium by the end of the week, then surely the discount is too big?
Maybe so, and it brings us to the third reason. And that is free money for the City boys. Like all public fund raisings, this flotation is organised and underwritten by the top City institutions. In a regulatory sense, this is just the way things work. And these guys know that the government is a sucker. The sales patter goes something like this: “Well minister, you really need this flotation to go well. That’s why we recommend pricing it ‘to go’. We mustn’t be too greedy here; give investors a decent profit on day one and everyone will be happy.”
But what they’re really saying is, we want to give all our mates in the City the opportunity to make a quick buck. And that’s why the City banks and hedge funds have sewn up 70% of the shares before the public even get a look in.
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The fourth reason the stock looks underpriced is because many analysts reckon there’s a decent property portfolio that can be cashed in. After Railtrack was floated in 1994, it too went about selling off its property portfolio. You know, all those properties ‘underneath the arches’. The shares performed very well in the early days. Over the long run things didn’t quite run to plan; the shares were eventually liquidated. But I’m not discussing the long run here. The point is, there are assets that can be sold to yield immediate profits. Of course, you can only sell it once and then it’s gone. But over the short run, that’s all the City wants.
Yes, there’s been a bit of a stink about the low valuation put on the Royal Mail. But we certainly shouldn’t feel too bad for the government. The price tag on the Royal Mail will be about £3bn. In reality, this is chicken feed. After all, the government has already cashed in some £28bn by stealing the Royal Mail’s pension fund. Of course, they now have to pay retirees directly out of the state coffers – but in reality, that’s an open liability stretching way out into the future – in other words: someone else’s problem!
It strikes me that the Royal Mail has everything set up for a decent start when shares start trading at the end of the week. I should say that this is my own opinion. And I’m aware that some of my colleagues don’t quite agree.
But I think there is an interesting trade here. And if you agree, you can make your application here.
A couple of pointers
Because the shares will be trading by the end of the week, it means the timeline is tight. Applications will need to be received by tomorrow night. The easiest way to apply is online using a debit card. You can apply for up to £10,000 of stock. If you wish to invest more, you’ll need to print off a form and post it with a cheque. But I wouldn’t bother – a) there’s no guarantee your application will get there in time (this is the Royal Mail after all!) and b) the issue is very likely to be oversubscribed. Applications are likely to be scaled back significantly… especially big applications.
That’s why I’m doing five applications of £2k, rather than one of £10k. You can apply on behalf of family members through the website.
Of course, one certainly shouldn’t expect a 40% premium on day one (Friday). After all, there will undoubtedly be other investors looking to cash in a quick buck too – putting some selling pressure on the stock. Moreover, analyst valuations are often wrong. But it does look like there’s going to be a decent profit here – and it’s probably worth the risk.
But before you go flying in, it’s worth reiterating: I absolutely don’t see this as a great long term business. There are just too many flies buzzing around the ointment. But I personally think it’s worth the risk to nab a quick profit here.
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