Royal Mail shares climb 4 after as first half profit almost doubles

Shares prices in Royal Mail rallied 4% in early trading on Wednesday after the newly listed company reported a solid set of first numbers to the market.

For the first half of the year, Royal Mail saw operating profits increase by almost 97% to £283m compared to £144m for the same period a year ago. Revenues grew by 2% to £4.52bn compared to £4.35bn previously. The revenue figure comes broadly in line or at the top end of most market expectations.

Delving deeper into the numbers, they are still positive

The headline figure will obviously please shareholders, and particularly those who may have been getting cold feet having bought into a share price that is currently trading some 68% above its listed price of 330p. However we must delve deeper into the earnings to gain clues as to whether Royal Mail shares have in fact been overvalued by the market at current prices.

First and foremost, £35m has been factored into these profits due to a one-off VAT credit, whilst there was also an additional £10m for other one off items, all of which will not be repeated in the second half of the year. So in truth, operating profits look more like £238m, which is still a gain of 35% in the space of a year. Not bad.

Secondly, we know that transformation costs were lower than expected and this also fed the bottom line. Transformation costs came in at £70m compared to £120m a year ago, a fall of 42%. Be mindful here that transformation costs were somewhat delayed in this set of results due to industrial relations and so this is expected to pick up in the second half of the year to around £150m-£160m for the total year, which will have a greater impact.

Taking that on board, these are still a very solid set of results and shareholders should be pleased. Royal Mail also confirmed it expects to report record revenue numbers for the first nine months of the year.

Royal Mail is currently trading at a forward 12 months price to earnings ratio of 13.12, which is broadly lower than its peers such as TNT and Deutsche Post. Most analysts have a ‘hold’ rating on the stock, which is not surprising considering the gains enjoyed and the fact these numbers will be unlikely to encourage early buyers to start profit taking.

Shares remain strong and we have already started to see buyers re-emerge at and around the 530p level to pick up shares on signs of price weakness, which if continued, remains a positive sign. And of course, we now get closer to the December trading period, which has historically been bullish for the FTSE 100.