It’s been a relentlessly brutal year so far for shareholders of International Distributions Services (LSE: IDS). After being founded under King Henry VIII in 1516, the company was known as Royal Mail until earlier this month. Alas, the company’s fortunes have not changed with this renaming, as its shares continue to plunge.
We bought Royal Mail shares in late June
Back when the business was still trading as Royal Mail, my wife and I decided to buy shares in the UK’s universal postal service provider. But what drew me to this company was its highly profitable overseas arm, General Logistics Systems (GLS). GLS collects, sorts, and delivers parcels in Europe and North America — and it’s the engine room for growth within IDS.
For the record, we bought into Royal Mail on 29 June at an all-in price (including dealing commission and stamp duty) of 272.8p. And what rotten timing that proved to be, because the shares have plunged like a stone since then.
Even as IDS, this stock keeps sliding
As I write, the IDS share price stands at 188.55p, down 12.55p (-6.2%) today. That’s a collapse of more than three-tenths (-30.9%) since we bought just under three months ago. Groan.
When Royal Mail released its first-quarter 2022 results on 20 July, it announced that it would change its name to International Distributions Services. This took effect on 4 October, when the company’s stock-market ticker subsequently changed from RMG to IDS. But this rebranding exercise proved futile, as the shares have crashed by over a third (-33.9%) in the past three months. Oops.
My biggest mistake with this trade was to buy into Royal Mail too early. I should have waited to see what effect the series of strikes by Communication Workers Union members would have on the wider group. Strike action has smashed the profitability of Royal Mail, plunging it into ever-larger losses. (The next national strike day of many comes next Tuesday, 25 October.)
Could IDS split in two?
Then again, GLS is highly profitable and, in my estimate, might be worth upwards of £5bn. Yet IDS as a whole is valued at a mere £1.8bn. In other words, the current market value of the old Royal Mail arm appears to be negative £3.8bn. As it is expected to lose hundreds of millions of pounds in 2022-23, this seems a fair discount — hence the dwindling IDS share price.
IDS directors have suggested that splitting the company into two distinct arms might unlock deep value hidden in the shares. Alternatively, selling GLS could generate a multi-billion-pound payday for long-suffering shareholders. However, IDS cannot simply ditch the Royal Mail business along with the name, because of guarantees made to the government when the group was privatised before its flotation. Hence, IDS must muddle along in its current corporate form — for now, at least.
Despite our hefty initial loss, we won’t sell our IDS shares yet. To me, a price-to-earnings ratio under 3.1 and dividend yield nearing 8.9% a year make this stock look very undervalued. However, with postal strikes set to continue, I expect the group’s profits to plunge. Therefore, I suspect things will get worse for ex-Royal Mail shareholders before they get better. So I won’t buy more shares just yet!
The post Since ditching the Royal Mail name, International Distributions Services shares have crashed! appeared first on The Motley Fool UK.
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Cliffdarcy has an economic interest in International Distributions Services shares. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.