Short-sellers win their bet against the Royal Mail

One big argument against Jeremy Corbyn’s plan to re-nationalise large chunks of the British economy was that it would prove eye-wateringly expensive. Yet one of the companies in the sights of the opposition Labour Party’s leader, Royal Mail Plc, is turning out to be anything but.
The postal operator’s heavily shorted shares plunged 9% on February 6 to a fresh low after its management warned of deteriorating letter volumes and risks to the business from threatened strike action. During the Royal Mail’s initial public offering in 2013, the British government was criticised for short-changing the public with a cheap offer price and gifting future profits to shareholders. But it seems it was taxpayers who got the bargain. The stock has almost halved since
the IPO, valuing the company at just 1.7 billion pounds ($2.2 billion).
In view of bleak cash flow expectations and large fixed costs, there’s a danger that an already reduced dividend may need paring back again. Instead of clamouring for nationalisation, now much less likely after Boris Johnson’s Tories won the recent election, the British public should be glad that Royal Mail is
investors’ problem, not theirs.
With urban streets clogged by e-commerce delivery vans these days, you’d think Royal Mail would be raking it in. The company’s European and US parcel business, GLS, is doing well, but the UK is a different story. Having been starved of investment under state ownership and with a network designed for delivering letters, Royal Mail is poorly positioned to take advantage of the internet shopping boom. About one-quarter of parcels being delivered by Royal Mail are sorted automatically, compared to about 90% at its peers, Berenberg analysts note.
Confidence that a new chief executive officer, Rico Back, can soothe workforce tensions and boost parcel revenues via investments in technology is evaporating. In 2018 employees won pay increases and a shorter working week in return for productivity improvements but the benefits haven’t fully materialised.
Royal Mail is stuck. It can’t easily hike letter prices because doing so might accelerate decline in volumes. Competition in parcels is brutal because gig-economy rivals don’t have the same fixed costs and worker protections, plus they can cherry pick profitable areas. Neither can the government let the company wriggle out of its expensive obligation to deliver the mail to some 30 million addresses six days a week.
Royal Mail would be harming itself if it reduced technology investments, which is why a dividend that costs 150 million pounds annually is vulnerable. At current prices, the shares yield almost 9%. Investors clearly believe a further cut to the payout is possible (it has already been reduced by 40%).
Short-sellers including Blackrock Investment Management UK Ltd., Bodenholm Capital AB and JPMorgan Asset Management UK won’t worry about that. Royal Mail’s long-suffering shareholders are running out of reasons to keep the faith.
—Bloomberg