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Royal Mail's risk/reward ratio about right after share price correction

Published: 10:00 26 Jun 2018 BST

Royal Mail van
RBC's non-base case scenarios - both of which it regards as unlikely - could see the shares rise to to 600p or fall to 420p

RBC Capital Markets said shares in Royal Mail PLC (LON:RMG) have now rebased – broker speak for “fallen heavily” - to a more appropriate level.

The broker left its price target unchanged at 500p but, given the parcels and letters delivery group’s share price collapse from 631p seven weeks ago to around 500p now, it has upgraded the stock to ‘sector perform’ from ‘underperform’.

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

With the shares yielding around 5.0%, the stock is now more in line with traditional mail/parcel-focused European postal peers.

RBC predicts a slight increase in the total pay-out in the current financial year to 25p from 24p in fiscal 2018 but sees little probable scope for a meaningful dividend hike or surprise return of capital to shareholders.

Broadly speaking, Royal Mail’s scope for bumping up the divi is constrained by its need to invest in changing the business, its well-publicised prickly relationship with its pensioners and union-represented workforce, while net debt as a multiple of underlying earnings (Ebitda) exited fiscal 2018 at 2.3, which was higher than fiscal 2017’s 2.1.

“Low growth, yield operational outlook not changed to us – but share price has, so risk/reward changes,” was RBC’s view, albeit expressed in telegram-speak.

Since hitting a peak in May the share price has been underperforming by 20-21%.

“We think this correction occurred as the bulls’ growth story with special dividends (we found) was not delivered,” RBC said.

The shares have now rebased and RBC reckons the risk/reward outlook is no longer appropriate to the ‘underperform’ rating it slapped on the shares in mid-April, hence the upgrade.

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