Royal Mail PLC downgraded by UBS as UK online sales seen declining

Royal Mail PLC (LSE:RMG) shares have been downgraded by UBS as the deteriorating UK economy is expected to hit parcel volumes and less is expected of management’s cost-cutting plans.

Having previously expected UK parcel volumes to be flat, the bank’s analysts now predict they will fall 5%.

This is based on an analysis of data from the Office for National Statistics on historical retail sales and online penetration, which has led them to take a more conservative view.

UK online sales are now expected to give back around a third of the growth seen during COVID (Figure 1-3).

“Some of this market decline will be partially offset by Royal Mail growth initiatives,” the analysts said.

But with its main trade union, the Communications Workers Union, having recently announced its intention to ballot for a strike, only 1% of volume tailwinds are now expected, compared to 2-3% before.

Back in March, the union threatened a strike as it accused the group of planning to sack staff and hire them back on lower salaries – a practice known as “fire and rehire”, as well as moving the goalposts during negotiations on proposed reforms, with the strike ballot taking place this month.

If the CWU does call a strike, the evidence from past strikes shows the main risk is that customers move away, with a likelihood of incremental costs associated with higher temporary works to clear delivery backlog.

“All these are partially compensated by savings on staff costs as employees are not paid during strike days.”

A strike of one to two days would be forecast to lead to a financial hit to underlying earnings (EBIT) of £50-100mln.

Currently the UBS forecasts assume around £100-125mln of the £350m cost cutting targets are linked to the relationship with the union and “there is risk they may not materialise in full this year”.

The rating was downgraded to ‘neutral’, with the share price target slashed to 280p from 420p and the previous close of 273.4p.