Royal Mail shares sink again as broker issues ‘sell’ downgrade

A major investment broker has downgraded Royal Mail to a ‘sell’ rating after the firm revealed falling revenues and weaker forecasts.

Small and mid-cap specialist Peel Hunt has recommended investors sell rather than buy shares in the postal service giant and has slashed its target price for the group from 500p per share to 307p. 

Royal Mail shares continued this downward trend on Tuesday, falling 3.4 per cent to 320.7p by the late afternoon, meaning their value has slumped by over a third in the past six months.

Peel Hunt said that while the company had recently achieved an ‘excellent year’ of results, it was becoming increasingly affected by lower profit margins in both its UK and General Logistics Systems (GLS) businesses. 

These were caused by the rising cost of delivering packages and a 10.2 per cent decline in domestic parcel volumes in its British arm.

Royal Mail has raised the price of letters and parcels, and is planning £350million in cost savings in response to rising charges.

But Peel Hunt warned that the squeeze on disposable incomes would likely cause a drop in non-essential purchases.

In addition, the UK Government is reducing its spending on Covid-19 test kits, which are a significant source of the courier’s pandemic-era income, and are no longer free for most people in England and Scotland.

On top of that, the number of international Royal Mail parcel deliveries plummeted by 42 per cent last year, and Peel Hunt expects this to decline by another 8 per cent in 2022.

The investment broker has lowered the forecast on Royal Mail’s UK domestic parcel  volumes from zero to a 10.5 per cent drop and is expecting an 8 per cent fall in the group’s addressed letter volumes, compared to -2.2 per cent previously.

Financially, it has reduced its revenue outlook for the company by around £700million, primarily due to an expected fall in UK sales, and its net income guidance by about 40 per cent to £362million.

Guidance: Peel Hunt has reduced its revenue outlook for Royal Mail by around £700million, primarily due to an expected fall in UK sales, and its net income guidance by about 40 per cent

Peel Hunt analyst Alexander Paterson said: ‘Unfortunately, a weakening consumer environment combined with inflationary pressures and a domestic business with a constrained rate of change makes for a highly challenging future.

‘We make substantial cuts to forecasts, as high operational gearing means lower revenues cannot be fully mitigated by cost avoidance and risks further downside to estimates.’

Royal Mail’s latest downgrade comes after fellow investment banks Liberum and Hamburg-based Berenberg Bank lowered their target price on the business, although only the former has changed its Royal Mail rating to a sell.

Many analysts are now expecting  Royal Mail to be demoted to the mid-cap FTSE 250 in the next reshuffle of listed companies on the London following the steep decline in its share price.

Susannah Streeter, a senior investment and markets analyst at Hargreaves Lansdown, said: ‘Royal Mail made a rapid recovery in 2021, but its recent share price weakness could see it fall out of the FTSE 100 as it’s once again in the drop zone.

‘Some investors appear to think its pandemic performance has now come unstuck with parcel numbers on the decline, but although volumes have fallen from last year’s highs, they crucially appear to be rebasing at a much higher level than pre-pandemic.

‘Royal Mail’s accelerated modernisation drive has also been boosting profitability, and the move to greater automation should make the company more flexible to deal with peaks and troughs of demand going forward.’