Royal Mail owner International Distributions Services PLC (LSE:IDS) can only be regarded as a 'hold' until the situation regarding the universal service obligation (USO) is sorted out, that's according to stockbroker Peel Hunt.
IDS held a seminar yesterday to discuss its response to Ofcom's USO consultation, in which it said that the regulator understands the need for change.
Letter volumes have fallen from 20bn to 7bn, but there has been no change in the USO for the last 20 years.
Ofcom's mandate requires IDS subsidiary Royal Mail to make a commercial return, which Ofcom defines as 5-10% operating margin, but this has only been achieved twice in 11 years.
A remedy requires ether prices to increase substantially, or the speed of service reduced.
Unions have agreed with the Royal Mail proposal and IDS believes it has the support of both political parties, though this has not been stated explicitly.
“Given the uncertainty, amplified by the upcoming election, and the inherently political nature of any changes to the USO, even if Ofcom could propose and implement the group's proposed changes without recourse to parliament, we see Hold as fair for the time being,“ said the broker.
Peel Hunt has a target price of 260p.