Is the Royal Mail share price worth 175p?

The beleaguered British postal service is trading 5% higher than where analysts believe it should be. But is the Royal Mail share price trading at fair value or is the company likely to see its stock slide in 2020?

Well, one saving grace for the company that has helped reverse its dismal outlook of late has surprisingly been Covid-19, with the pandemic and subsequent lockdown boosting parcel volumes at Royal Mail.

The rise in parcel deliveries has been driven by businesses shifting their attention to online sales and consumers doing likewise due to being locked down at home amid the global pandemic.

As a result, Royal Mail reported a 38% year-on-year rise in parcel volumes, representing more than 117 million items delivered across the UK in the three months to 28 June. Meanwhile, GLS, Royal Mail's international parcel network, saw volumes rise 22% year-on-year over the same period.

‘As the UK starts to come out of lockdown, we are no seeing any change as yet in customer behaviour,’ the company said in statement.

‘Our customers are wanting more parcels delivered to their homes and are sending fewer letters. We are working as quickly as we can to adapt our business to meet our customer needs.’

But despite the good news, analysts and investors remain negative in their outlook for the British postal service and on aggregate believe the stock will suffer in 2020.

Analysts believe Royal Mail should be trading lower in 2020

According to the 13 analysts offering 12-month price targets for Royal Mail the median estimate sits at 165p per share, implying a potential downside of 5% for the stock.

However, the most optimistic broker among them, Goldman Sachs, believes the stock has the potential to trade as high as 200p, representing an upside of 14%.

Meanwhile, analysts at Credit Suisse expect the British postal service could see its share price fall as far as 95p, implying a potential downside of -45%.

What Royal Mail is actually worth is clearly up for debate. But the direction its share price goes in remains highly dependent on a myriad of factors. Some are in its control, such as its transition away from letters in favour of parcel deliveries, while other macroeconomic factors persist and continue to apply downward pressure on it and other UK stocks. Not to mention the fiercely competitive landscape for parcel deliveries, with Royal Mail competing with the likes of FedEx, DHL and UPS to name a few.

Royal Mail among the top five most shorted UK stocks

The company’s dismal outlook has prompted short-sellers to start circling, with Royal Mail among the top five most shorted UK stocks, according to data compiled by the Financial Conduct Authority (FCA).

The company currently has a 9.1% short position against it, with BlackRock Investment Management and Pictet Asset Management holding the two largest positions at 3.94% and 1.42% respectively.

Several other financial institutions, including Adelphi Capital, Egerton Capital, Eleva Capital, JP Morgan Asset Management and Lucerne Capital Management have also taken out short positions against the troubled postal service.

Short interest in Royal Mail has steadily increased since the end of February and, unless the company is able to deliver its turnaround strategy effectively it is likely to see this trend continue.

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