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Royal Mail Group shares slide as Deutsche delivers downgrade

Last updated: 13:00 01 Dec 2017 GMT, First published: 10:38 01 Dec 2017 GMT

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Here's your parcel..Deutsche Bank delivered a ratings downgrade to the private postal giant today

Royal Mail Group PLC (LON:RMG) was among the top laggards on Footsie Friday as a heavyweight broker downgraded the shares to 'sell' from 'hold' and cut the target price.

Despite Moya Green, the chief executive, doing a fine job, operational challenges will become even more challenging over the next 12 months, reckons analyst Andy Chu.

READ: Royal Mail says industrial dispute could hit full year earnings as it reports lower first half profits

He thinks it will become trickier to modernise and take costs out of an already complex business in an environment where GDP growth is weak, and there is low visibility on business confidence post Brexit.

Also in the mix are generally higher wage bill pressures and an on-going mediation process with the unions over pay and pensions.

Falling profits year-on-year ...?

Chu reckons that given cost avoidance measures will be hard to execute over the next 12 months, he thinks that profits for the full year to March 2019 could fall year-on-year.

"We reduce our FY March 17/18 and FY March 18/19 EBIT post transformation costs by 0.5% and 5.1% respectively to £498.7m and £485m," he says.

"RMG is still in the early phases of transformation, and we think that shareholders are not at the top of the stakeholder list as the primary focus is on restructuring, employee wages and pensions and M&A."

Deutsche cut the target price to 359p from 450p.

Jefferies cuts target too ...

US house broker Jefferies, which rates the shares 'underperform', takes a similar view, saying an inflection point is approaching, as the labour dispute between the firm and the Communication Workers Union (CWU) comes back to the fore as mediation talks close.

It envisages an improved pension offer, costing £450mln per year, with wage rises at 3% per annum.

This results in a 15% cut to the broker's EPS (earnings per share) estimates, and a cut to the target price for the shares of 10% to 300p (from 330p previously).

German bank Berenberg goes the other way though, hiking its target to 415p from 375p, after the now private postal firm's good performance in the first half.

"The company did a much better job at driving volume growth in UK parcels and controlling costs than the market had expected," it said, but noted that the pay and pensions dispute, was as yet, unresolved.

In London, Royal Mail shares lagged 4.14% to 423.60p.

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