Royal Mail PLC (LON:RMG) was the top faller on the FTSE 250 on Tuesday morning after the postal group was downgraded by Credit Suisse.
Analysts at the Swiss bank moved the stock down to ‘underperform’ from ‘neutral’ and slashed their target price from 492p to just 325p.
READ: Royal Mail faces two-day strike later this month in dispute over pensions and pay
Arthur Truslove and co also chopped their underlying earnings (EBIT) forecasts by 5%, 18% and 31% for the next three years (FY18, FY19 and FY20).
Credit Suisse now expects Royal Mail to generate EBIT of £515mln, £444mln and £382mln in 2018, 2019 and 2020 respectively.
“We expect worsening letter revenue trends and a costly labour deal to render 2018 earnings unsustainable, and do not expect FCF to cover dividends from FY21,” wrote Truslove in a note.
The analyst points to drives from RBS and Santander – almost a third of the current account market – as well as the UK government to try to reduce their mail volumes.
No one sending letters anymore
Similar digitation initiatives in Denmark and the Netherlands coincided with accelerating mail volume declines, while Truslove also points out that even over-65s are sending fewer and fewer letters.
On top of the fact that nobody is sending letters any more, the analyst reckons staff wages will rise by 3% once the next round of labour negotiations are concluded, which would cut underlying earnings by up to £50mln a year.
Royal Mail shares have lost a fifth of their value so far this year, and shed another 4.4% in Tuesday afternoon trading, down 17.2p to 372.5p.
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