Royal Mail PLC downgraded to ‘sell’ on pay worries

Royal Mail PLC (LSE:RMG) has been downgraded to a ‘sell’ by broker Liberum, which sees trouble ahead in the next round of pay talks with the Communications Union (CWU).

Liberum notes that the CWU, which speaks for the majority of Royal Mail’s staff, has submitted a pay claim that the broker estimates will be around 7.8% if it is to match inflation.

“With RPI currently at 7.8%, we see a risk of a margin squeeze for the group if a pay deal is agreed anywhere close to that level.

“Even linking a pay hike to productivity might not be enough to defend margins, with a 3% improvement being the best the UK business has achieved.”

Forecasts for the years to March 2023 and 2024 have been cut accordingly and Liberum now sits at the bottom of the consensus range.

In the 2023 financial year, the broker now expects pre-tax profits of £562mln (normalised) against £725mln previously and £509mln in 2024 against £675mln.

Ratings for the shares are not demanding in absolute terms or relative to European postal group peers, but the current valuation does not adequately reflect the cost risks and productivity challenge faced by the group, Liberum concludes.

The new target price is 355p from 470p previously.

Shares fell 2.8% to 377p.