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Royal Mail downgraded by JP Morgan due to 'lack of positive catalysts'

Published: 11:03 22 May 2018 BST

Royal Mail
Royal Mail faces a 'more operationally challenged period ahead', says JP Morgan

Royal Mail PLC (LON:RMG) has been downgraded by JP Morgan after the postal operator issued a mixed outlook alongside its full year earnings.  

JP Morgan cut its rating to ‘neutral’ from ‘buy’ but raised its price target to 561p from 530p.

“We downgrade RMG to neutral due to the recent re-rating in the share price, the lack of positive catalysts moving forward and (in our view) a more operationally challenged period ahead,” it said.

“Our EPS (earnings per share) forecasts are reduced by 3-7% due to higher transformation costs and weaker underlying expectations.”

Last week, Royal Mail said it is targeting £230mln in cost savings in the UK business in fiscal year 2018/19 but restructuring costs are predicted to be at the upper end of the forecast range of £130-150mln.

READ: Royal Mail's profits drop on pension charge, revenues rise on growth in parcels

For the year to 25 March 2018, it reported a 36% decline in pre-tax profit to £212mln for the year to 25 March 2018 due to the impact of an International Accounting Standards 19 pension charge. Revenues rose 2% to £10.1bn as growth in parcel volumes offset another decline in letters.

The company also warned that it expects another drop in letter volumes in 2018/19 and that it faces tough competition in its UK parcels business. 

Bernstein cuts target price

Bernstein maintained a ‘neutral’ rating on the stock but lowered its target price to 590p from 540p.

The broker said 2017/18 marked a “successful year for Royal Mail”, with the UK business returning to market share gains following several years of declines, a “very strong performance” in its international parcels arm General Logistics Systems (GLS) and the end of negotiations with the Communication Workers Union on its pension scheme.

“Royal Mail can now concentrate on other strategic priorities under the new group CEO, Rico Back,” Bernstein said.

“These include cost reduction in the UK network, how best to deploy Royal Mail's increasingly strong balance sheet, and continuing to grow GLS' network.”

Bernstein retained a “favourable outlook” on Royal Mail but concluded that the upside is currently limited.

“Whilst we remain positive on Royal Mail's top-line prospects in parcels, we continue to see challenges on margins in GLS, and the UK remains one of Europe's most competitive parcels markets,” it said.

In late morning trading, shares in Royal Mail fell 0.3% to 554p. 

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