22nd May 2014 by The Harried House Hunter
So has the reality of a private company with a huge public service obligation finally become clear to investors in Royal Mail (LON:RMG)?
The government, quite rightly, wants Royal Mail to face competitive pressure. All things being equal, competition delivers for consumers of such services.
However competition has to be qualified when one firm, especially one that has been publicly owned in the past, must guarantee a universal service.
Investors today now know that Moya Green, Royal Mail’s chief executive believes that rival postal services such those offer by TNT Post Direct, and due to be expanded, pose a £200m risk to revenues in 2017/2018.
The rival firm has also complained to Ofcom about changes to charges by Royal Mail for completing deliveries where TNT does not.
As Ms. Green said this morning – “We believe TNT Post UK’s complaint is unfounded. We believe the changes are fair, reasonable and fully within the guidance provided by Ofcom.
“TNT Post UK now has direct delivery operations in much of London and in Manchester and in Liverpool. It has stated its intention to take its own direct delivery service to a number of other cities, with the aim of covering around 42% of addresses by 2017.
“TNT Post UK can cherry-pick easy-to-serve urban areas; delivering easy-to-handle post to homes less frequently than Royal Mail and to no defined quality standard. Royal Mail is required to deliver six-days-a-week, overnight, throughout the whole country, to stringent quality standards and at a uniform, affordable tariff.
“Moreover, we are also required to deliver any items TNT Post UK does not consider economic to deliver itself. If TNT Post UK is successful in delivering its stated objectives, this could threaten the fundamental economics of the universal services.”
Royal Mail suggests that it may not be able to maintain a required margin of profitability on such business. Investors now need to consider what the regulator Ofcom makes of all this. We have a brief statement from the regulator today.
“We would expect Royal Mail to take appropriate steps to respond to the challenge posed by competition, including improving efficiency said the regulator.” So no immediate intervention, and yet one broker Panmure Gordon, alluded to the possibility of intervention at some point in its note this morning.
Royal Mail shareholders need to seriously consider this threat. For if the regulator does not provide some leeway, it may be them shouldering the burden of a universal service facing a cherry picking rival.
Of course, there are other factors such as the dividend, the price you buy at and the length of time you want to hold a stock, to consider as well.
And almost all firms face some sort of regulatory scrutiny or challenge that can affect decisions to invest. It is interesting however, that this situation could mean that many investors who sold out at a high valuation have done well, but ‘buyers and holders’ have been given something very significant to worry about.
It is not that the Royal Mail’s regulatory position, obligations and competitive pressures were not understood previously to some extent.
But this morning, the boss put a number on it in terms of revenue, and that has concentrated minds.
The government wanted Royal Mail to be a buy and hold stock, one that would show the benefits of investing for the long term. With institutional investors it failed singularly to achieve that aim, but even now after the controversy of the float subsides, such a long term strategy may have less appeal after today.
T.D. Direct Investing this morning said that in April the proportion of sellers to buyers on its books was 53% to 47%.
It will be very interesting to see the proportion of sellers among retail investors when it announces the May numbers.