Thursday tips round-up: Royal Mail, United Utilities, Serco

28th Nov 2013 08:32

Reality checks are always useful. Despite what the bulls would have you believe Royal Mail's latest interim revenues were just two per cent higher and those in the main UK parcel and letter delivery business up by only one per cent. As well, the at first glance attractive nine per cent increase in parcels revenues was driven by price increases, with volumes flat. Furthermore, the company itself warned that a similar pattern may be evident in nine-month numbers because some business shifted to competitors due to fears of industrial unrest and strike action. Costs were, admittedly, well-contained, helping drive an improvement in margins to five per cent. GLS, the higher-margin international express unit, also put in a good performance. There are also hopes that a labour deal is in sight. At 570p, Royal Mail is trading at over 16 times forward earnings - rich compared with postal peers and in line with Deutsche Post, with its larger DHL express business. Similarly, even allowing for potential asset disposals, and putting GLS on an express player multiple, Barclays only gets to a "base case" fair value of 500p. Hence, current price levels look Panglossian, the Financial Times' Lex column said. Despite the regulatory uncertainty at 5.5%, United Utilities still sports one of the most attractive dividend yields amongst utilities. Furthermore, Wednesday's interim figures show that the company is positioning itself for the next regulatory review of the water sector. The firm has committed to absorbing some of the allowed increase in prices for the 2014-15 following year. Hence, its tariffs will be held to the rate of inflation rather than the allowed RPI plus 1.2%. That will be funded via the £75m settlement with HMRC with the rest of the windfall going to customers over the next five years. The utility also wants to keep household bills below inflation over the next five-year regulatory period. Most importantly, however, chances are that the new price limits will allow dividend rises to continue to outpace inflation, according to The Times' Tempus. A week before it learns the outcome of the review into its Ministry of Justice and other government contracts, outsourcing firm Serco seems to have turned into the most accident-prone outfit in the sector. However, the potential for a significant bounce in its shares exists if the outcome of the review is favourable. For the bulls it is not in Westminster's best interest to be too hard on the firm as - simply put - they need the outsourcers so as to continue to generate savings. Yet not everyone is convinced. There are those who think that there is still worse to come. The shares now sell on only ten times earnings, "but this is one for the brave alone," Tempus reported. Please note: Digital Look provides a round-up of news, tips and information that is impacting share prices and the market. Digital Look cannot take any responsibility for information provided by third parties. This is for your general information only as not intended to be relied upon by users in making an investment decision or any other decision. Please obtain a copy of the relevant publication and carry out your own research before considering acting on any of this information.AB