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Analysts at Berenberg lowered their target price on postal service operator Royal Mail from 575.0p to 480.0p on Thursday but reiterated their ‘buy’ rating on the stock.
Berenberg said weaker parcel numbers and poor employee relations had hampered cost reductions for Royal Mail, leading the company to reduce its group underlying earnings outlook for the year by more than 40%.
However, while Berenberg thinks that the risk of industrial action in the next few months will likely remain an overhang in the short-term, in the mid-term, it believes the shares remain “unfairly discounted”, given the value of its European business and the improvement in its UK market position over the past few years.
Even before thinking about the potential costs of any strikes, RMG has estimated that tensions with the unions will mean that the UK business foregoes approximately £200.0m in previously expected cost savings over the course of the year, thanks to stalled productivity initiatives. According to Berenberg, when combined with slightly weaker-than-expected parcel volumes, this means the UK business may now barely turn a profit in the 2022-23 trading year – implying a roughly 40% downgrade to group EBIT for the year.
The German bank also highlighted that management had long resisted investor calls to split the UK and international businesses, but said pressures on its domestic operations meant that it was now more open to a split.
“Given the discount on which the shares now trade, this would almost certainly be in the interests of shareholders, in our view, though it may well just be a gambit to put more
pressure on the unions – if the UK operation loses the financial backstop of GLS then redundancies may well be a more realistic prospect than pay rises,” said the analysts.
“The shares are now trading below the value of the GLS division: On our reduced forecasts, the group now trades on 6.5x CY 2023E EBIT – a circa 30% discount to history. Our base valuation for the GLS division is circa 390.0p, equating to circa 140% of the current value of the group’s shares. While we still think a breakup of the group is unlikely, overall we think this should help to act as a valuation backstop for the shares,” said Berenberg.
Reporting by Iain Gilbert at Sharecast.com
