Private investors should think carefully before buying Royal Mail shares when they come on to the market in the coming weeks, according to Alistair McCaig, market analyst at IG.
A significant worry for investors, said McCaig, is the fact that Royal Mail services are currently exempt from VAT. This gives it a pricing advantage in the profitable parcel delivery area of its business.
McCaig argued that such an advantage being bestowed upon a privately owned company ‘will almost certainly be challenged’ by its competitors.
At present Royal Mail is obliged to provide a ‘universal postal delivery service to every door in the country’. This is likely, remarked McCaig, to see the postal service become a ‘drag’ on the profits generated from other aspects of the business.
This obligation is enshrined in law until 2021, ‘but demographics, which mean there is globally less demand for letters, may mean the obligation to delivery to every door could be dropped in future'.
McCaig sees the rapid growth in online shopping as a positive for Royal Mail, as it has ‘the infrastructure and brand recognition already established to enable it to take advantage of this growing market'.
Under plans revealed by the government this morning, Royal Mail employees will be given a combined 10 per cent of the shares in the company, while a further pool of shares will be reserved for them to buy. This would mean that each employee would have shares worth approximately £2,000 ‘gifted’ to them, with the option to buy more, calculates McCaig.
Private investors seeking to buy shares will be able to do so, with a minimum investment of £750 required. The precise share price has yet to be revealed.
McCaig said that its important for investors to remember that while Royal Mail should probably be regarded as an ‘infrastructure asset’, its profitability would be reliant on the success of the retail sector, as the biggest revenue generator for the company is likely to be the delivery of online purchases.
Royal Mail has set aside £133 million to pay a dividend next July. This dividend would be for just part of the financial year. The organisation estimates that the annual dividend payout on an ongoing basis will be in the region of £200 million.
IG is running a ‘grey market’ on the possible market cap of Royal Mail. This is a kind of open bet where people can specify any market cap they like without any parameters being set by IG. The betting so far indicates that IG's customers are expecting the market cap to fall between £2.83 billion to £2.93 billion.
Such a valuation would leave the company on the cusp of the FTSE 100.