Royal Mail still a buy but “the delivery on cost savings has to improve”

Royal Mail PLC (LSE:RMG) is a stock still worth buying, according to UBS, despite the letters and parcels group’s underwhelming trading update yesterday.

Full-year adjusted operating profit of £758mln was below UBS’s bullish forecast of £784mln and also below the median forecast (£771mln) of analysts who cover the stock.

On a divisional basis, the overseas arm, GLS, returned operating profit roughly in line with expectations at £342mln while the UK business’s earnings before interest and tax (EBIT) disappointed at £416mln; UBS had expected £442mln while the consensus forecast was £430mlm.

“The UK division miss is driven by weaker parcel volumes at the end of the quarter and achieved Pathway to Change cost savings at the lower end of the range,” UBS noted.

Furthermore, Royal Mail announced cost savings of £59mln that were close to the bottom end of its £55-80mln range.

“For the market to believe in the self-help story we argue the delivery on cost savings has to improve,” UBS conceded and the commentary on next year’s outlook “seems to suggest some downside risk to the sell-side consensus of £649mln (UBSe £580mln).”

UBS values Royal Mail shares at 420p on a sum of the parts basis.

The shares currently trade at 314.6p, up 4.9% on the day.