Is the IDS share price great value right now?

The IDS share price has delivered a whopping gain after the group finally reached an agreement with postal workers over pay earlier in the summer. While the stock endured a wobble last week after it emerged Royal Mail had been defrauded to the tune of £70m, it could be one of the better-value options on the FTSE 100 right now.

• Royal Mail cheated out of £70m in under-declared mail scam.
• IDS share price up 20% over the past three months after pay agreement reached with workers.
• Valuation metrics suggest that the share price isn’t reflecting the business’s true worth.

Spare a thought for shareholders of Royal Mail-owner International Distributions Services [IDS.L].

Having seen IDS’s share price plummet over the past couple of years – mainly due to industrial action weighing on sentiment – things started to look up this summer. Not only had a deal been struck with the Communications Workers Union to end strikes, but IDS’s share price delivered 20% over the past three months.

Yet the stock dropped almost 6% last week after it emerged that a family-run operation had cheated Royal Mail out of £70m. The perpetrators are alleged to have skimmed-off millions between 2008 and 2017 by under-declaring mail.

However, with the stock still significantly down on 2021 levels, a major headwind is out of the way, and business is improving. Is IDS’s share price one of the biggest value plays on the FTSE 100?

What’s happening with the IDS share price?

Over the long-term, the IDS share price hasn’t delivered for investors. The stock has plummeted 50% over the two-year period as a series of headwinds weigh on sentiment. Top of IDS’s problems had been postal workers striking over working conditions and pay.

But with that issue now resolved, the IDS share price has gained 15% year-to-date, with most of those gains coming from the beginning of June, when a deal was struck with workers.

Helping boost sentiment was a July trading update in which IDS reported it had seen a slight upswing in first quarter revenues and was targeting an adjusted operating profit this year. In the three months to June, revenue increased 0.3% to £3bn. Although revenues at Royal Mail dropped 4% to £1.8bn due to a lower price mix and lower Covid-19 test kit volumes being sent through the post, revenue at GLS grew 7.4% to £1.2bn.

The axing of 10,000 jobs last year should also save the business £150m over the next financial year – something to watch out for in future IDS results.

The update is welcome considering the last time IDS updated the market it posted an annual loss of £748m. Royal Mail made a thumping £1bn loss last year due to strike action and productivity issues.

Is IDS share price good value?

What makes IDS’s share price interesting is its potential as a value play. The group’s price-to-book value is 0.62 in the most recent quarter, indicating that its market price is higher than the book value of the company’s stock. Analysis from SimplyWallStreet also suggests that IDS’s share price is trading 20% below its fair value. The discounted cash model takes into account IDS’s future cashflow, less expenses.

Analysts also seem warmer on IDS’s share price. Peel Hunt upped its rating on IDS from ‘sell’ to ‘hold’ after the first quarter numbers, upping their price target from 190p to 260p. Among the analysts, IDS’s shares have a 290p 12-month median price target. Hitting this would see a 9.6% upside on Friday’s close.

Where next?

From a value investment point of view, IDS’s share price could be worth further investigation. However, there are caveats.

The end of divisive industrial action is welcome, but the group still faces significant challenges. One problem is a continued decline of parcel volumes at Royal Mail – down 10% year-on-year in the first quarter to 283 million. Addressed letter volumes remain 30% below pre-pandemic levels. A dividend was last paid out in 2022.

It will be interesting to see how new CEO Martin Seidenberg, who was previously CEO at GLS, shakes up the business. Seidenberg’s first job will be to appoint his own successor at GLS and a new CEO for Royal Mail to replace the outgoing Simon Thompson.