Member Info for Commonsense5

Just FYI I just congratulated the M&S holders on the chat board post its 17% rise yesterday many of which think M&S is still cheap. I just set out the case for RMG with its extreme valuation opportunity - just FYI in case anyone needed a reminder it’s on the M&S board.

So pleased for all you MKS holders and ITV too etc yesterday

I read with interest some of the valuation comments on this board on M&S and wanted to highlight what I think is the next pop on the FTSE … The Royal Mail - interim results due a week today

IF I may gate crash your board for a few lines to explain why ..

Founded by Henry VIII and 500 years old and the market leader in the uk of parcel deliveries with 35% share and an e-commerce fulfilment beneficiary of the structural change that is happening. Twice as big as its nearest competitor

In the last two interim periods it made £1bn + of operating profit (Ebitda for those who care is £1.5bn+) H2 last year to March 21 of £700m op profit and they recently said H1 current year to September of £400m operating profit - PBT very similar). They guided in September that H2 operating profit ‘will be larger than H1’ so we expect £850m for the full year at least. In March net cash ex leases was £600m which will now be nearer to £800m and almost certainly a near £1bn net cash by the year end of March 22. It has a large pension scheme which is £3bn in surplus, yes surplus. Revenue growth in the first 5 months trading this year was up 8%. UPS trades on 17x pe, Deutsche Post trades on 14x P/E to name a few both upgraded recently as parcels are growing strongly but poor old RMG has a market cap of £4.25bn and Enterprise value therefore of £3.4bn at 425p. The divi current year has been set at 20p BUT we expect further news on the excess cash and or increased divi or specials etc - EPS consensus is 65p ish. Actually there are two long term bonds repayable 2024 and 2026 of £900m at 2.5% leaving actual gross cash on the balance sheet of near £1.7bn.

The recent share price fall from 500p to 425p has been painful but I was reassured yesterday with MkS and ITV that the market can snap back quickly in these over sold names

JP Morgan recently came out and said wrong price with an 805p share price target (425p last night). The average analyst share price target is 650p ish. In my 30 years in the city I have never seen such extraordinary value / miss pricing which I hope begins to get rectified a week today

The icing on the cake is the new ceo who has now been there almost a year (having been a NED before for I think 3 years) is the former head of product for Ocado. He appears properly smart and taking RMG into the modern world

Anyway just a thought for you

Mks £4.4bn, £800m real net debt ex leases so £5.2bn all in Enterprise value and guidance full year pre tax profit of £500m - today was also their full interim results

RMG £4.2bn - £800m net cash not debt - pre tax profit closer to £700m + being conservative (operating profit £850m is the guidance)

If RMG simply confirms guidance or close to RMG should also be 16.5% on the day

M&S ended up 16.5% today at £4.4bn mkt cap - good news to show what can happen at the bottom of the FTSE 100

Mr Shaun - the dividend current year is certain at 20p BUT I hope given 60p earnings per share and I hope £800m net cash might get more - 1/3rds first half 2/3rds second half - but to repeat the company are well able to pay more

As you say Mr Anger great the market giving M&S a rally today +15% - us a week today

Ha ! Yes it does seem that way !! Funny

I agree - frustrating but in a matter of days it will be sorted - RMG shares are soo illiquid - it is easy for market makers to do that - sadly the problem is a lack of buyers - buyers don’t need to second guess the results but rather wait for certainty and pay 10% higher on the day - personally I want that 10% - back to 500p should be a straightforward trade

Very very good article in the Telegraph today about the new challengers to Amazon who are far more beneficial for the 3rd party retailers brand etc - I don’t know these companies but Huboo, Shipbob, Byrd. One small change is that on the delivery package the stamp isn’t Amazon to the 3rd party retailer but rather the underlying brand itself. The great thing for Rmg is that these smaller challengers won’t have their own delivery network.

Most most importantly there is a bar chart of monthly e commerce sales growth over 5 years which clearly supports RMG’s view as stated in their announcements that we have had structural change and it isn’t going away !!

Why Buffett isn’t a big shareholder I don’t know - we have our champion big holder - well done him.

A long way to go in share price terms

With supply chain issues Black Friday will be too late this year so inevitably e com will be all copying Amazon - as I say just got an Amazon e mail of early Black Friday offers - this has to be good for two reasons 1. Smoothing the peak from Black Friday anyway re workload and 2. Early positive sentiment for Rmg’s statement as early as next week when we get the RNS. Remember H2 last year operating profit was £700m - they are only guiding to ‘above H1 this years £400m +’ so plenty I hope of slack Re guidance. With revenue up 8% first 5 months I think we will get quite a positive surprise Thursday week.

Great to see BT leading the ftse 100 risers yesterday up 11% - RMG not too far behind over a few days but our big day should be on Nov 18, after today 8 working days away ??

Suspect both Royal Mail and BT are both too cheap but RMG ticks more boxes for me. Like both however.

Long live the value rally !!

At last UBS have moved to neutral from Sell - yay !! What poor quality stockbroking - I say that as to have a sell with a target price 8.5% only below the then actual price was odd on the first place.

Anyway average analyst target price is 648p bberg says this am

I think we will be where we should have been at 480p or so by the 18th Nov then 550p ++

Don’t forget H2 last year RMG made £700m operating profit - this year they have guided only £450m ish H2 being more than H1’s £400m the market think - BUT revenue is 8% up in first 5 months ….. that is quite a prudent estimate for H2 and allows for a lot of headwinds

The rally will continue - don’t be short

Mr redceo - all good banta, with my market hat on I promise you there will be a lot more institutional buyers at 700p than now as it becomes a consensus buy and IF IF RMG proves (I hope) it’s long term earnings potential post automation and new facilities coming through and very importantly the fact that per parcel RMG is the best delivery courier from an environmental perspective. RMG is a very underheld stock for institutions who prefer buying businesses with proven consistent earnings patterns. Please trust me on this. Either way I really hope you enjoy the ride and get to enjoy your profits.

I agree Mr Beetlejuice … £10 !!

Sorry bombarding you but the more I read about RMG the more crazy low I think the equity value is. Here is a random one for you … page 175 of the BT (yes British telecom) report and accounts shows the bonds that BT have issued - it is quite a long list. The backdrop here if you read my previous comments is that although on the face of it RMG will show I think about £800m NET cash (ex leases) at the interims actually all the gross debt of £900m is in bonds due 2024 and 2026 split 50/50 costing 2.5%. The GROSS cash I think will be £1.7bn and by the interim period end and by the year end March 22 even after the acquisition will be approaching £2bn !! Enough to buy almost half the companies equity! However you can’t simply repay those bonds so just leave them in place. Hence surplus cash is massive IF cash flow can be sustained. So … look at the BT bonds - page 175 - a long list but more recently they seem to have tapped the bond market and issued bonds such as the 1.874% Eur500m coupon / interest due 2080 !!! Yes 2080 ! For our 500 year old business that is not that long but for most companies … Wow - if BT with its £8bn DEFECIT pension fund and net debt on top what could our little 500 year old business achieve for some good sustainable long term sensible bond debt. I am NOT in any way talking about overloading RMG with debt !! BT also has some more expensive debt as uou will see on page 175 but don’t worry.

Final point - what is slightly incongruous is that those companies that can typically borrow well (low interest costs) typically are high quality companies and have a high PE rating. However RMG appears to have lowish debt AND an equity value that is on its knees. One is probably wrong !

All this comes down to the quality of earnings longer term. Obviously H1 2020 was a half year horribilis with loss making but I think driven by management but importantly hopefully improved working relationships with the unions that RMG will be emerging from Covid a vastly better business than ever before. I am sure I will get comments from postmen to the opposite BUT if the company carries on achieving operating profit of near £1bn AND with a big fat pension fund surplus and a pot of cash - all issues should be surmountable to all stakeholders benefit. And, the company’s equity will prove to be actually super valuable !!

Here’s to another better day

Mr angersharkz re letters … I agree but interested in any more expert views on the board … advertising budgets are v high at the minute (Sorrell said recently that it is the most bouyant market of his career of 64 years - mirrored by others) albeit probably limited a bit by supply client supply constraints at the minute - HOWEVER .. I think the advertising through the letterbox is one of the best advertising medians - companies such as cox and cox and oka send their little brochures through the door which always get at least a glance - unlike commercial adverts on tv which I never watch - hence not surprised by those comments

I did a quick review of ftse 100 discount stocks this am - there are only a handful sub 10x pe and only two or three are 6.5x or below - I get 7.5x is cheap for a good company but 6.5x is ridiculous !! 15% ish upside from 6.5x to 7.5x which gets us back to near 500p which is still cheap and where we should have always been as a minimum. I think especially post jpm sharing their view this am but 430p is a much better safer buy now than 403p felt on the lows without obvious support a few weeks ago. Chart looks v compelling

Mr Angersharkz super helpful this am highlighting the JP Morgan note, thank you - as you say JPM confirming still 800p+ target price - seen it too. Not many near doublers in the ftse so it should catch a few eye balls at least globally which is exactly what RMG needs, coupled with some short closing

Thx angershark - is that Jpm today ?

A good start to the week - great to see RMG right up there on the Ftse leaderboard .. from a chart perspective as soon as we break through 430p this will jump straight to 450p, hopefully to then allow the return to 500p + on the statement - fingers crossed

I noticed that a high quality research house Seeking Alpha has done some work on Deutsche Post a few days ago. I just highlight some of their comments (My observations below are in brackets)

1. Valuation is a forward pe of 14. (This equivalent value would put RMG on 800p ++)

2. In 2021 they say revenues have been significantly higher than 2020 IN ALL months (Interesting and a sign this market is v strong). Year on year growth they say was 13% and management say they expect this structural growth to stick.

3. Since 2018 debt has increased slightly to Eur12.9bn while ebitda has doubled !! Mkt cap now Eur 66bn. They have eur 5bn liquidity of cash ! (More than RMG’s market cap!)

4. Operating cash flow is around Eur 8bn this year - so enterprise value is about 10x cash flow - (again that would put RMG nudging 800p)

5. DP guide that they pay dividends of 40% to 60% of earnings - the last year was 56%. They also conducted a Eur 1 bn buy back programme over 1 year. (This is good stuff in my book. A mix of higher dividends AND a share buy back. RMG are guiding to a 20p divi out of 60p ish of earnings per share so only 33%. Given RMG’s superior balance sheet this does make RMG look a tiny bit mean ! ) (I do think a 25p ongoing divi rather than 20p is eminently fundable for RMG - put this on a 5% yield and the shares would be 500p + easily. This should be the starter for ten and then add a small amount of buy back.)

6. The Seeking Alpha writer concludes as it stands Deutsche Post might be slightly undervalued BUT concludes if the market carries on growing then it will ultimately look cheap (Oh to have a 14x pe multiple !!)

As I say, given RMG is on nearer 6x pe I firmly believe it has significant upside.

Just a few anecdotes as I say.

This news from Glasgow RMG re the country’s first green energy al electric Royal Mail office is really important - as we know RMG also has the lowest carbon footprint per parcel in the UK. At some point some of the massive pots of ESG money will spot this and start investing. I am sure this will take a lot of capex but I have no doubt it will be worth it as it will ultimately win market share as e-commerce companies start to increasingly factor in the carbon footprint of their delivery costs. Well done RMG Govan (Glasgow)