Stock Pitch – Royal Mail Group (LON:RMG)

While many investors sleuth around in the relatively uncharted waters of the AIM market, it is the FTSE 100 that has been leading the way in recent months, supported by a host of listed giants trading at relatively attractive valuations.

Royal Mail (LON:RMG) is one such company. The UK’s universal services provider delivers letters and parcels to 31 million UK addresses six days a week. This obligation results in a large fixed cost base but also a highly trusted brand (ranked in the top 10 of YouGov’s Best Brands 2021).

Despite its standing, the shares trade at 7.2x forecast rolling earnings, 5x trailing twelve month free cash flow, and just above 1x tangible book value. Pick a metric, and Royal Mail Group looks cheap.

But there are risks. That large cost base is a concern in an inflationary environment and, as one of the nation’s largest employers, wage inflation is a threat. Its privileged position as USP invites government scrutiny, and the group must keep workforce unions onside. It has its fair share of stakeholders.

Still, the new management team is confident in Royal Mail Group’s prospects and the strength of its balance sheet – so much so that it recently announced the return of some £400m to shareholders in the form of special dividends and share buybacks. That’s close to 10% of the current market cap.

This combined with a more than 5% forecast dividend yield, a Value Rank of 95, and a significant valuation discount to US peers such as Fedex and UPS begs the question of whether or not the shares are simply too cheap.

Royal Mail was pitched to the Stockopedia Investment Club on Tuesday the 18th of January at 496.5p.

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About the Stock:

Royal Mail Group (LON:RMG) operates in the Industrials sector, and is a part of the Freight & Logistics Services industry group.

Its shares currently trade 441.4p on the LSE Main Market. There are some 995,296,793 shares in issue and it’s nearly 100% free float, so the stock is extremely liquid.

The StockRanks are uniformly favourable for Royal Mail and the group is classified as an Adventurous Large Cap Super Stock. From a factor perspective, the group brings a lot to the table.