Royal Mail’s (RMG) share price jumped on Thursday as it reports better-than-expected half-year results.
While revenue rose by 7 percent in the half-year ending 26 September, profits before tax soared from £17 million to £315 million. Net debt halved from £1 billion to £540 million. This jump in profits was caused by the ‘structural shift’ in parcel delivery – a shift induced largely by the pandemic.
Cash generation from the business was strong. In fact, RMG’s financial position was so strong that it announced a £200 million share buyback and another £200 million in special dividend. The former state-owned-company expects profits to reach £500 million in this calendar year.
“The pandemic,” wrote the CEO Simon Thompson, “has resulted in a structural shift and accelerated the trends we have been seeing. Domestic parcel volumes, excluding international, are up around a third since the pandemic.”
At the time of writing, Royal Mail’s share price trades at 460p.
Royal Mail’s (RMG) share price has performed well during the pandemic.
From the 2020 low of 120p attained in March, Royal Mail rose nearly 400 percent in 15 months. This was caused by the government-sanctioned lockdowns and work-from-home trends. Household relied heavily on the Post Office to deliver goods and parcels. This caused investors to chase ‘Pandemic Winners’ stocks.
After a year-long rally, RMG’s uptrend lost momentum; prices headed south soon after. With support now appearing at 400p, it is time to buy?
Yes, for a medium-term bounce. The stock was very oversold when prices reached low 400p. However, I would be wary to going “all in” into these Pandemic Winners at this stage of the pandemic – simply because the world economy may re-open next year.
The upside target for a long trade is at 530-550p. A break below the critical 400p level would be damaging chartwise, and may lead to a further fall into 350p.
Royal Mail’s share price soared in 2020 when investors expected a big rebound in sales and profits. This reaffirmed that notion that the market is forward looking. Share prices rise and fall way before the actual results are produced in the balance sheet.
Still, results today has reaffirmed RMG’s covid bonus. Prices are rejuvenated after a dispiriting four months. The question is whether this rebound can lead to a sustained rise in share prices.
Most brokers are continuing to hold a bullish view of the delivery company. 10 out of 15 analysts are recommending RMG as a ‘Buy’ or ‘Outperform’, another 5 as ‘Hold’. The lowest price target for RMG is 400p while the highest is pencilled in at 1,000p.
With ecommerce continuing to grow, Royal Mail is well-positioned to capture this trend.