The Royal Mail (LON: IDS) share price, also known as International Distributions Services PLC (LON: IDS), has risen 8.16% in the past week following the signing of a deal between the parcels company and its workers over the weekend. Details of the deal have yet to be public, leading many analysts to express caution about buying IDS shares.
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While I admit there is a risk in buying Royal Mail shares given the lack of details regarding the deal signed between the Communication Workers Union (CWU) and the company, I am arguing that the Royal Mail share price had already discounted the UK Mail and parcels delivery service before the deal’s singing.
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In past articles, I mentioned that investors had already written off the loss-making UK operations and that IDS’s market capitalisation was solely based on its profitable GLS International parcels service, headquartered in the Netherlands. Royal Mail acquired the firm in 1999.
Therefore, while Royal Mail has been losing about £1 million daily, GLS has remained profitable, which explains why IDS shares were barely moving despite the lack of progress in the CWU talks.
Hence, my assessment that Royal Mail shares may be trading at a discount is based on the fact that investors had already written off the UK business. Still, should you rush to buy the shares now? The short answer is NO. There are still several unknown variables that make it quite risky to buy the shares now.
For example, can the company stem the financial bleeding? We can’t know for sure, but the firm might have no choice but to conduct an equity raise to raise the much-needed funds to remain in operations until it breaks even and stops losing cash, diluting existing shareholders.
Royal Mail has not published the details of the deal it reached with the CWU. Many are worried that the concession made to the worker’s union may still hinder the firm from making the necessary automation and shift changes that could make the firm profitable again.
Therefore, I would adopt a wait-and-see attitude towards Royal Mail (LON: IDS) shares.Â
*This is not investment advice.
Royal Mail (LON: IDS) share price.Â
The Royal Mail (LON: IDS) share price has risen 8.16% in the past week after reaching an agreement with the CWU.
eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk.
