UK Mail PLC Looks like good value to me

I have some history with UK Mail PLC, having bought shares in the company in October 2011 and sold them one year later, for a 33.7% total return. 

I thought it was a solid – if unexciting – business that was well worth investing in at the right price. Having sold in October 2012 for 262.5p the shares then went crazy, shooting all the way up to and beyond 700p.

The share price has now come back down to 500p and with UK Mail’s improving results I think the company looks reasonably priced once again.

500p may well be twice the level I sold them at two and a half years ago, but when the facts change (UK Mail’s revenues, earnings and dividends have all grown) my calculation of “fair value” changes as well.

Here’s how UK Mail measures up:

  • Medium growth: 10-year growth rate of 5.4% (the FTSE 100 managed just 1%)
  • Medium consistency: Raised revenues, earnings or dividends 67% of the time over the last 10 years (54% for the FTSE 100)
  • High profitability: Average post-tax return on capital employed of 18% (about 10% for the FTSE 100)
  • Low debt: Total borrowings are less than 5-year average post-tax profits
  • High capital expenses: Capex over the last 10 years has been greater than earnings
  • High yield: Dividend yield of 4.3% at 500p (3.7% for the FTSE 100 at 6,500)

The rest of this article was originally published on the Bull Bearings website, which is no longer with us.

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

8 thoughts on “UK Mail PLC Looks like good value to me”

  1. Hi John,

    Does this have a low debt?
    I see the post tax income at the 31st March 2015 was £15.9M
    The companies total liabilities were reported as £115M at the same time
    This gives a ratio of 7.23 which seems high.

    I guess you are using a different set of numbers here.

    A couple of other things might shed some doubt on UK Mail are it’s profit margins are very thin at about 4%, granted better than Tesco but so low it’s only slip betwixt cup and lip as they say.

    It also appears to have grown revenue over 5 years from £395M to £485M – a rise of 22.7%
    The profit rose from £11.6M to £15.9M – a rise of 37% — somewhat faster than the revenue
    However the total liabilities have risen from £69M to £115M — a rise of 66%

    The debt (or liabilities) is rising faster than the business.

    The other concern is that UK mail isn’t converting the reported profits to cash. It’s been negative in 4 of the last 5 years and negative by £22.8M last year — which is considerably higher than the reported post tax profit.

    The low for this stock in the last 12 months was 380. – If the Greeks have anything to do with it, 380 may well retested 🙂

    Would a better selection perhaps be Royal Mail, which has virtually no debt, has tons of valuable property and has a rising revenue, despite the declining letters business?
    It also has it’s problems though, given it’s a low margin business (although higher than UK mail) and it has the potential for Union activity that could drag it down.


    1. Hi LR

      On the debt side of things, it only has about £10m of interest-bearing debts, i.e. bank loans etc. The rest of the liabilities are mostly trade payables, so they’re part of working capital.

      I don’t think thin margins aren’t necessarily a problem. It depends on the sort of business, although generally higher is better. It also depends on what proportion of costs are fixed rather than variable, although having said that I don’t currently look at margins directly.

      Royal Mail – I don’t have an opinion as it doesn’t have the 10-year track record that I demand. Once it has that track record as a listed company then I’ll have something to say about it.

      Thanks for trying to poke holes in my analysis though, always appreciated. “Details that could throw doubt on your interpretation must be given, if you know them.”, as Richard Feynman once said.

  2. Its not affording the dividends. I see the average operating cash flow over the last five years of £23 million and Capex of £19 million with dividends at an average of £10.5 million. More worrying the free cash flow position is getting worse not better and is 0 for 2014 and projected -£22 million for 2015 according to FT.

    1. Hi Andrew

      You’re right, but those figures are somewhat skewed by heavy capex in the last couple of years funded by some debt and drawing down on cash. Capex typically runs at about £7m to £8m but was £46m this year and £28m the year before, due to the new national sorting hub and other investments.

      As the latest annual report says, “We are in the midst of a phase of strategic investment to place us at a significant competitive advantage for the medium and longer term”, so weak or even negative free cash flow isn’t necessarily a bad thing, it depends on the underlying cause. If negative free cash flow is caused by heavy investment in the future of the business then as long as free cash flow doesn’t remain negative for too long, it can be a good thing.

      However, you’re right to flag it up as an issue because I do think free cash flow is important. In the investments I’ve made so far there does appear to be some correlation between the free cash flow to dividend ratio and the dividends sustainability, so while free cash flow isn’t a key metric for me at the moment, it may become one in the future.

      1. John, That puts a better angle on the cash flow. If these two years are one offs then it should all turn roses in future years. Worth digging deeper.


      2. Hi LR, definitely. Although I’m about 80% quantitative, I still think it’s a good idea to dig under the numbers and try to understand what’s going on. It won’t always lead to better results, but I think it will often enough that it’s worth while.

    1. Yes, I would say the 25% dividend cut is an admission that raising the dividend at a time when free cash flow was going to be negative for a couple of years was a bad idea.

      I wouldn’t rule out an investment though. I still think it’s a good company and the price is certainly more interesting now than it was at 700p when it was caught up in the excitement of the Royal Mail IPO.

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