Credit Suisse puts UK’s Royal Mail back to lowest rating on risks to volume growth

(Reuters) – Credit Suisse downgraded Royal Mail on Thursday as it sees risks to parcel volume growth and margins due to easing of movement restrictions, a sharp decline in COVID-19 cases and rising labour costs as the centuries-old postal company struggles with inflation.

Credit Suisse analyst Hannah Burrows cut Royal Mail to “underperform” from “neutral” and trimmed its price target to 345p, implying a 3.8% downside to Wednesday’s closing price.

The brokerage had upgraded the company in November 2020 as it benefited from a boom in parcel demand during pandemic lockdowns, which had helped it make up for a decades-long slide in letter volumes. But with easing restrictions, parcel volumes have tapered off while rising inflation has increased costs.

“Despite company commentary indicating otherwise, our analysis suggests Royal Mail has lost share of the UK parcel market, which we do not think is widely appreciated and is a cause for concern,” Burrows added.

Burrows forecasts a slight decline in Royal Mail’s parcel volumes in this fiscal year, in contrast to market expectations of a 3% growth, as outdoor movement increases and testing kit volumes decline while shopping habits only partially normalised last year.

Parcels represent 72% of Royal Mail’s revenue. The company’s adjusted operating profit jumped to 404 million pounds ($540.47 million) in the half year ended Sept. 26 from 37 million pounds a year earlier.

Credit Suisse also said Royal Mail’s upcoming pay deal with its largest union, Communications Workers Union, will threaten the group’s 2022-23 profitability as it will drive labour costs higher than current market expectations.

“UK labour shortages are stark, with tightness at the highest levels this century and wage growth data indicating more pressure than in Europe,” it added

Royal Mail said last month it will lay off around 700 managers as part of cost-cutting efforts aimed at transforming the company.

($1 = 0.7475 pounds)

(Reporting by Aniruddha Ghosh in Bengaluru; Editing by Krishna Chandra Eluri)