Royal Mail PLC shares offer value if management can agree good pay deal

Royal Mail PLC (LSE:RMG) is facing a tougher year but its shares, under pressure from wider uncertainties and active union negotiation, still offer, says Barclays Capital.

A decline in revenues for the UK parcels and letters (UK PIL) from the “significant headwind” from the ending of free Covid test kits and other consumer spending signals, is forecast to result in a 54% plunge in underlying profits (EBIT), with slower revenue growth is also forecast to hit profits for Royal Mail’s overseas parcels arm, GLS.

Overall, group EBIT for 2022 is forecast to come in at £711mln versus the consensus of £779mn.

Union negotiations are now taking place, with UK PIL management looking to agree a pay award commensurate with incremental labour efficiencies, the analysts said.

“We see the backdrop as challenging, given CPI is at 5.5% with scope for further appreciation, while progress to date in productivity gains has been disappointing, partly due to ongoing pandemic effects.”

A 5% pay award has been pencilled in for 2023 forecasts, partly offset by 3% additional productivity gains, resulting in a new shortfall of circa £100mln.

“We believe management is focused on ensuring progress on efficiencies, however we view the current backdrop as challenging,” the analysts said.

Nevertheless, the recent share price performance reflects an “overly pessimistic view” by the market, assuming no additional efficiencies are struck, an outcome that “would question the feasibility of the UK PIL transformation plan and bring about change, should it come to materialise”.

Being more optimistic of Royal Mail’s management achieving their aims, Barclays has kept its ‘overweight’ rating but slashed its share price target 38% to 400p.