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Just an anecdote… private equity looks at businesses profits on an ‘LTM’ basis - the Last Twelve Months. I am not inferring anything about PE but simply how they look at a company’s profitability run rate. If you look at RMG - the Last Twelve months adjusted operating profit assuming £400m for this H1 to September (as guided) would be over £1bn. Quite something. H2 operating profit last year was £630m ish. The company has guided this H2 will be more than H1; so we assume £450m giving £850m for the year. I think given Mr UBS’s negative view we would all be quite happy with £850m operating profit for the year BUT my point is it could be higher ! Especially given first 5 months revenue was up 8% year on year. Fingers crossed. A bit of patience and this value will come through !!

Reckon Kretinsky will sell at some point but I have no doubt am sure it will be to UPS at 600p + cheap relative to their rating - serious comment

Mr Angershark as I tried to say my comment wasn’t directed at anyone but rather to suggest if anyone makes a personal comment it is best just totally ignore it and keep it factual. I really enjoy everyone’s input. Good stuff.

Directed at anyone who gets personal

This chat is what ruins chat rooms

I see Stockopedia yesterday pm came out with a positive comment on their website - I don’t really use Stockopedia but they are highly regarded by many investors. It talks of the RMG ‘earnings yield’ - this is not dividend yield whereby 20p of the 60p of earnings are paid out but the full earnings 60p / share price or the post tax profit / mkt cap. It says average company Uk is 5% but (as we have discussed) that the RMG ‘earnings yield’ is 15% ! This number is arithmetically the inverse of the P/E multiple.

I revert to the balance sheet to put this yield in context again as per a previous comment. Company valuations get interesting when they have proper net cash and potential surplus cash to distribute. If the company doesn’t need the cash (post capex Etc) then it can return signigicantly more than 20p out of 60p in theory. I regard RMG relative to most companies as relatively non cyclical (unlike say the house builders) and when non cyclical companies in structural growth sectors start throwing off cash then valuations get very high. To repeat in RMG, the big change between the year end numbers March 2021 to March 20 was that the company’s drawn down overdraft facility of £700m got totally repaid care of £760m of cash flow generated in the year to March 21. That left gross cash of £1.5bn as at March 21. (Remember the two bonds mature of £900m 2024 and 2026 and are cheap at 2.5% interest cost and shouldn’t be repaid early.) importantly by March 2022 being the next year end, even after the GLS new acquisition, it is easily possible that the gross cash will be £2bn!!! This is a lot of cash to be sitting there especially when the market value of the whole company is £4.2bn !!

I think whatever the right answer is on what to do with surplus cash - having some kind of annual buy back programme where everyday the company can pick up parcels of shares it considers to be cheap would seriously help the stability of the share price and stop hedge funds capitalising on the stocks illiquidity. Even if the buy back was only a small part say £100m (1% of the company) - which in the grand scheme of £2bn gross cash is small would go a very long way to helping. I fear the jiggery pokery of these hedge funds with resultant crazy volatility scares off genuine shareholders. If I get really off the fence I think these hedge funds cannot believe the power they have relative to the RMG stock and how easy it has been to smash the price from near 500p to 400p on the back of what was a very reassuring statement back in September. Keep the faith shareholders.

14 working days to go … until we see £400m H1 operating profit in black and white versus break even the prior year confirmed and a big uplift I hope in this net cash / gross cash number as at End September 2021 and I hope comments about surplus cash or not. Fingers crossed.

Despite very odd trading again - 1.5m shares traded 8.30 to 4.30pm and then 1.5m traded in one lump at 4.35pm in the closing auction - at least this is the first time since September we have had two closing prices in a row of 420p+ - This is important / consolidation from which to build. I get why certain funds will probably want to buy ahead of the statement to close shorts but I am just amazed professional investors / funds would be selling in volume. Hey ho. Time will tell but net net a good 48 hours

No idea what is going on - either way a lack of proper buyers - BlackRock is usually index and hover +-5%. Much as I have high conviction on RMG it remains a very frustrating stock. The order book closed last night at 427p and then uncrossed to my slight surprise at 425p - with UPS news being digested today I hoped for 430p + - so 416p last I looked is v disappointing

Someone asked earlier about UPS and price rises - there is a Bloomberg headline that revenue per package at UPS jumped 13% in Q3. Like others clearly these carriers are putting decent price rises through - something yer man at UBS may have under estimated - a reminder in last RNS - uk parcel revenue domestic UK volume for Royal Mail minus 5% but revenue £ +4% indicating +9% price rises

agreed - these bigger carriers including RMG are not just in a structurally growing sector BUT they clearly have pricing power versus their customers

It won’t take many overseas institutions to start buying to get RMG to 500p++ be patient

UPS revenue +9% year on year = structural growth. RMG first 5 months revenue +8%

A good beat on Q3 and like Deutsche post are raising guidance for rest of year !! Bodes very well for Nov 18th RMG !!! Impossible for UBS not to move more positive now at some point - 450p pre results I hope

Yes - it isn’t technical ‘manipulation’ - powerful funds if they want to are allowed to be sellers in the morning and buyers in the afternoon, they can hit the bids first thing aggressively when other buyers haven’t yet got themselves ready and the stock stays down - market +1%, RMG down 1% buyers (not uncommon) nervous holders think there may be a problem and either don’t buy or sell thinking further to fall … it is like a game of poker where those with big pots have an advantage - but not manipulation - just !

Following on from my post this morning - out of interest today all day 800k shares were traded until the final auction when 1m shares changed hands in one trade - IF someone was holding the stock down during the day in thin volume it paid off - it can never be proven - just sad so much was sold into the causing auction - hold onto your stock !!

Re surplus cash - first and foremost the board will be investing into the business to make it better - again I don’t know exactly what Warrington and Daventry are costing or also how many other similar sites might be needed longer term. Depreciation is about £400m per year so any more capex than that you are eating into cash reserves. This is good as ultimately you get the benefit of higher earnings .

Ultimately if the business has real surplus cash then whether buy backs or dividends etc the business should be valued on the after tax profits which in theory could be ALL be paid out.

There is no ‘right’ answer - however the debt (2 bonds) costs 2.5% whilst the equity costs the dividend being near 5% so you would buy back equity arguably pre repaying the debt especially given gearing is low

If the company are sure the end market is firm then pay out more dividends annually in a dividend - currently 20p of 65p paid out roughly. Specials would be more advantageous perhaps if the company is not quite as certain as to its sustainable earnings - like a cyclical house builder .

Either way the company will hopefully guide us in a few days time as to what it is going to do with £1.7bn ish of gross cash or £800m ish of net cash - what they shouldn’t do is just sit on the cash and not guide us how they intend to return excess capital.

Very exciting

UPS Q3 statement tomorrow in the US - $175bn mkt cap, $15bn of debt and $10bn net profits current year - slightly higher value than RMG !!

As ever as an aside ‘amazing’ how the RMG share price gets hit on the open .. maybe there are funds out there keen to see the price lower .. before they buy back !!??? Call me sceptical !! Only 140k shares traded - just don’t worry - the fundamentals will come through in 10 days or so …

More importantly I re read the report and accounts this weekend - a few interesting observations …

Market cap £4.15bn. I talk of the net debt ex leases of probably £800m ish at the interims coming up BUT there is another deeper point. RMG has drawn to bonds of £895m repayable 2024 and 2026. Both are cheap money at 2.5% costing only £23m a year ! This is good. The actual GROSS cash is £1.5bn ! Now probably £1.8bn. Just sitting there earning - near nothing ! More than a third of the market cap. To repay the bonds early would need a hefty penalty charge to the bond holders. Hence what on earth will the company do with cash as by the time the bonds are repaid it will have generated probably near the required amount to repay them.

The cash generation last year was £762m AFTER capex of £350m ish.

The REAL adjusted operating profit last year was £807m - only mentioned once in the report and accounts page 45 - it is quite rare that companies don’t strip out the cost of one off exceptionals - I am not being critical at all here just reminding of facts. That was AFTER Covid exceptional costs of £152m which related to ‘elevated absence levels and protective equipment’. Best not to add that back BUT it is a bit of a help Re newer cost headwinds.

This year .. in first 5 months - forget the headlines … revenue was UP 8.2% for group year on year. Domestic parcel volumes yes down 5% BUT revenue for that up 4.1% - hence 9% price inflation to revenue - unless I am missing something ! I would like to understand this more

Finally the fundamental investment decision and key valuation metric - is about whether RMG is in a long term structural growth sector .. I read separately that in September online shopping became 29% of total shopping versus 28% - also yodel and Deutsche Post saying recently this year bigger than last year Re parcels. !

Finally back to the cash - the company says it will distribute excess capital and on page 46 it says it considers it needs a maximum level of distributable reserves of £2bn, retained earnings are £4.5bn ish. Hence why I think the interims should guide us as to what is going to happen to all this excess cash !!

So £4.15bn mkt cap. £900m good core debt due 2024/2026 with then £1.7bn real cash sat there !! On a business with real operating profit last year £807m with revenue up first 5 months 8% year to date with £152m of extra costs Re Covid last year much of which won’t be repeated …. Total bonkers but very exciting with big upside

Wrong price !

Mr Beetrootjuice thank you for your comments, genuinely interesting. As a complete outsider from the finance industry but having become very interested in RMG I would observe the following;

1. I totally get that the workload for obvious reasons has significantly increased. I also get that either walking and carrying OR getting in and out of the van every day will have it’s toll. It sounds a bit like the army - you simply cannot do it until normal retirement age. I would like to think you should have faith in the union and a point I have made before this executive team (Simon Thompson) appears to have a better relationship with the unions - the union leader was on the big annual city meeting for example. Maybe messaging isn’t dropping down. I respect what you say however.

2. The RMG group has the biggest pension group surplus of funds probably in the UK. The city won’t see any benefit of that - £3bn surplus last count - is for RMG to look after the workforce. As general retirement ages increase for the rest of us - I suspect the postmen will get a different deal and needs to from the sound of it ! This is serious point but again it would be very different if like BT you had a £8bn pension deficit or whatever it is.

3. I guess to your point - wasn’t Rmg trying to recruit something like 10k young apprentices I would hope to share this workload - are you seeing any of that ?

Apart from my postman I have never met any management member of Rmg for the avoidance of any doubt.

I just ask again - when do the 8 round letters actually go out ? Does someone do it next day or is a replacemnet found later in the day ?

Thx

Beetle juice - interesting comment - 8 walks out of how many in total roughly to put your comment In perspective. Also What happens to that post a day delayed - I have to say I think as many of the reasons for no shows of posties are Covid related I can’t believe fines won’t be small

Mr Oligarch, my point was simply that the numbers will look very good relative to the previous year. The market doesn’t seem to have absorbed the fact H1 was extremely good which in turn builds up the net cash pile (ex leases). Have a flick at some of my previous posts that refer to fundamental value - £4.2bn mkt cap, near £800m net cash (ex leases) and operating profits of £850m forecast with £400m done. Bonkers. It is fundamental value that everyone should look at. I checked the UPS valuation last night - forecast to produce $10bn net profit (I assume after tax) on a market cap of $170bn !!! Also with $15bn net debt. Yes 17x multiple !! We can get there long time if not higher. Just trying to be genuinely helpful post a long innings in the city doing this - albeit when I was doubling my holding on what I thought was an excellent trading statement in September you might not believe me !!

In a few weeks time the H1 £400m operating profit of RMG will be on the screen versus the fairly shocking interims this time last year where adjusted operating profit of £37m was achieved - this year will be an over 10x improvement. I think at this point investors will realise the enormity of what has been achieved in RMG.

https://investegate.co.uk/royal-mail-plc--rmg-/rns/half-year-report/202011190700078019F/