Why UK Mail Group PLC Is A Better Bet Than Royal Mail PLC

When Royal Mail (LSE: RMG) went public at the end of last year, a key selling point of the company was the group’s exposure to the UK parcel delivery market. As more and more consumers do their shopping online, Royal Mail boasted that it was set to benefit from the rising number of parcels being sent around the UK.

However, nearly twelve months on from Royal Mail’s IPO, the company is struggling as growth in the key parcel delivery business has failed to materialise. 

Poor trading 

At the end of July, Royal Mail released a worse than expected interim management statement for the first three months of the company’s financial year. 

The company reported low single-digit revenue growth across the group, thanks to a weaker-than-expected performance within the group’s UK parcel division. Further, the company warned that given the rising competition within the parcel sector, parcels revenue for the full year is likely to be lower than anticipated. Still, management stopped short of issuing a full profits warning. All in all, for the three months ended 29th June, Royal Mail’s group revenue increased by 2%. 

With revenues growing at an anaemic rate, Royal Mail is slashing costs to boost profitability. Cost savings of £25m will be realised during the second half of the year. 

Nevertheless, Royal Mail can only cut costs so much and with competition increasing within the sector, the group’s revenues are only going to come under further pressure over time. 

A better pick

As Royal Mail struggles, UK Mail (LSE: UKM) has reported a solid start to the current financial year. Reported group revenues for the first quarter increased by some 2.5%, compared to the same period last year. Adjusted revenues increased by 4.5%.

This growth was driven by, you guessed it, an increasing number of parcel deliveries. UK Mail parcel volumes jumped by 10% year on year during the first quarter. 

What’s more, as Royal Mail relies on cost cutting to boost profits, UK Mail is expanding capacity to reduce costs, streamline operations and steal market share. 

Valuation

Unfortunately, as UK Mail is growing rapidly investors are willing to pay a premium valuation for the company’s shares. At present the company trades at a forward P/E of 17.1 and supports a dividend yield of 3.6%. City analysts are expecting the company to offer a yield of 3.9% next year. 

In comparison, Royal Mail trades at a forward P/E of 13.2 and city analysts are expecting the company to offer a yield of 4.8% next year. Nevertheless, over the long term Royal Mail’s outlook is less certain and UK Mail’s long-term prospects are certainly more attractive. 

But UK Mail’s growth comes at a price, which could out some investors off. The trouble is that most growth shares with bright prospects tend to trade at similarly high valuation multiples.