In the words of Liberum analyst Gerald Khoo Royal Mail parent International Distributions Services PLC (LSE:IDS) managed to deliver a “better than feared” set of results for its financial year to the end of March, nevertheless, the stockbroker remains unconvinced.
Khoo, in a note following Thursday's results, repeated a ‘sell’ recommendation and a 135p price target (current price: 206p) and said he has doubts over company’s plans.
“The FY loss was smaller than feared, with both divisions ahead of expectations, but no dividend is to be paid.
“The Royal Mail guidance is broadly similar, but we have doubts about the aim to fully offset the recent two-year pay deal with the agreed working practice changes. GLS guidance is below consensus, reflecting new strategic initiatives, and capex is to be higher.
“We see downside risks to consensus estimates on balance.”
Specifically, the analyst told investors he remained sceptical about the company’s expectation that its UK pay deal will be ‘self-funding’.
“It [management] sees the two-year pay award recently agreed with the CWU (still subject to approval by members) as being offset by the benefits from the agreement,” Khoo said.
“We remain sceptical that the c.8% over two years can be fully offset given the maximum annual productivity improvement since privatisation is under 3%.”
Instead, the analyst looks at the stock’s current market valuation and sees ‘excessive optimism’.
“We believe the current valuation implies excessive optimism on the value of the UK business,” he added.
“This was lossmaking in the year to March 2023, and will probably remain lossmaking in March 2024E (based on our forecasts and consensus, and implied by management targeting a return to profitability in March 2025E).
“In our view, the group has yet to set out a convincing strategy to return the UK business to sustainable profitability.
“The weaker profit outlook and higher investment requirement for GLS is also concerning, although the business still has strong fundamentals and strategic positioning over the long term.”
In London, International Delivery Services shares fell 16.2p, or close to 7.5%, in Thursday's dealing to change hands at 205.6p.