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Royal Mail is being threatened with nationalisation by the Labour Party, but this looks less likely now that the Conservatives are pulling ahead in the polls.
Labour plans to nationalise no less than five industries if it is elected, and Royal Mail is near the top of the list. The party has said it would look to bring the company ‘back into public ownership at the earliest opportunity’.
UK general election preview: what to expect this week
What does Labour want to do with Royal Mail?
Labour intends to reunite Royal Mail and the Post Office under its plans. Royal Mail, which is responsible for delivering letters and parcels, was privatised in 2013, but the Post Office, which is the nationwide network of branches, was not.
It also intends to launch a new publicly-owned Post Bank that would operate out of Post Office branches to provide all communities with ‘face-to-face, trusted and affordable banking’. A new Business Development Agency would also be created and based in the Post Bank to provide ‘free support and advice on how to launch, manage and grow a business'.
Labour also wants to reform Royal Mail’s pension arrangements with its staff. It has said it would ‘legislate to allow the CWU-Royal Mail agreement for a collective pension scheme to proceed and allow similar schemes’ to be introduced. A dispute broke out between The Communication Workers Union (CWU) and Royal Mail soon after the company unveiled a five-year turnaround programme in May 2019.
How will Royal Mail shares perform if Labour is elected?
Royal Mail shares have taken a hit since the election was called in late October, but this was driven by its poorly-received interim results being released in late November that revealed its ‘transformation programme’ was behind schedule and the threat of industrial strike action hitting its busy period during the election and Christmas. Shares lost over 10% but have recovered somewhat since as strike action has been prevented.
There is little evidence that the threat of a Labour government has weighed on Royal Mail shares since the election was called, possibly because the Conservatives have managed to hold on to the lead throughout the campaign. Still, polls have got it catastrophically wrong before and the Conservative lead over Labour is narrow according to some pollsters, enough so that a hung parliament is still a possibility.
It is fair to believe that Royal Mail shares will fall if Labour wins a majority. They are likely to experience downward pressure if there is a hung parliament too, but it will be harder for Labour to push its plans through parliament if it must rely on the support of other parties – none of which support nationalising any industries.
How will Royal Mail shares perform if the Conservatives are elected?
A Conservative majority is in Royal Mail’s interests. It would allow the company to continue business as usual and takes the threat of nationalisation off the table.
But Royal Mail still faces huge challenges in this scenario. It will still have to find a resolution to the dispute with unions, continue to fend off new competition, and address the transition from less letters to more parcels being sent. It has admitted that its transformation is ‘behind schedule’ and has warned the core UK business could end up in a ‘break-even or loss-making position’ in the 2020-2021 financial year. Still, it has said it remains on track to deliver adjusted operating profit of £300 million-£340 million in the year to the end of March 2020, which is in line with guidance but down significantly from the previous year.
A Conservative win could see Royal Mail shares rise as the risk of a Labour government will have been removed. However, brokers believe Royal Mail shares are slightly overvalued, which could limit any bounce. The average target price from 11 brokers sits at 222.85 pence, slightly below the current value of 223.1p.
Recommendation Number of brokers
Strong Buy 2
Strong Sell 2
Average Target Price 222.85 pence
Source: Shares Magazine
Other than the election, the next date in the calendar is 6 February 2020 when Royal Mail will release a trading update covering the first nine months of the financial year. While the election poses a threat to Royal Mail, it also benefits revenue because of the large amount of leafleting and postal votes that are sent during the campaign. Plus, Christmas is also a busy time of year for the company because of the number of cards and parcels being shipped around the country.
Assuming it hasn’t been nationalised, its next trading update is a chance to prove that it has a caught up with its transformation and put in a good performance during a very important quarter. However, the problems caused by its highly unionised workforce are far from resolved and the threat of future industrial action remains high.