Gamble of the week: Royal Mail's plucky rival
This independent parcel delivery service stands to profit from the growth of online shopping, says Phil Oakley.
The privatisation of Royal Mail continues to take up a lot of column inches. But meanwhile, this smaller rival the country's largest independent postal operator is quietly getting on with making money.
The business has been around since 1971 and up until 2009 was known as Business Post. It just announced a 28% jump in full-year pre-tax profits. Despite a strong run up inthe share price over the last 18 months,I think it could be a good long-term bet.
You won't see any of its posties pounding the streets. It works in partnership with Royal Mail, who deliver its letters for it. UK Mail (LSE: UKM)gets a lot of its letter business from financial, publishing, retail and utility firms, and makes a decent profit from them.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
But the real reason to invest in UK Mail is not letters, but parcels, where volumes grew by 19% last year. More of us are doing our shopping online, which is leading to rapid growth in parcel deliveries.
This is a very crowded market, with the likes of Royal Mail, DPD and Yodel throwing a lot of money at it.So, to be a good investment, a business has to have a competitive edge and I think UK Mail has it, in the form of its delivery network.
It all stems from a central hub in the Midlands, spreading out to 50 sites across the UK. By combining its letters and parcels business across the same network, UK Mail is able to get lower unit costs than many of its rivals, better efficiency and better customer service levels. This makes it very profitable.
A new hub and extra sites are being built, adding more capacity. As more of the sorting becomes automated, this shouldfeed through to more efficiency andlower costs, reinforcing its competitiveposition. This should allow UK Mail totake a bigger slice of the parcels market.
The firm is also expanding into nichebusinesses, such as packets delivery anddigital printing, which have the potentialto boost profits. Parcels growth willslow this year because it will be tough toreplicate last year's stellar performance.
UK Mail is also a little short of capacityuntil its new hub is finished in 2015. Theshares are no bargain on nearly 18 timesforecast earnings, but UK Mail lookscapable of growing strongly over thenext few years.
The big risk for investorsis that the new hub disrupts its businessand leads to poor service and a loss ofcustomers but assuming it avoids this,it should be able to takes market sharefrom Royal Mail while benefiting fromgrowth in the parcels market.
Verdict: buy
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.
After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.
In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.
-
Do you qualify for the Winter Fuel Payment if you live abroad?
The Winter Fuel Payment will be means tested for expats living in Europe, in line with the new rules impacting those in the UK. But a quirk in the system means not all countries are eligible.
By Katie Williams Published
-
What the Employment Rights Bill means for your job
New workplace reforms are set to give employees new rights to benefits and flexible working
By Marc Shoffman Published