JP Morgan maintained its ‘overweight’ rating but cut its target price to 500p from 535p.
The financial services firm said the post office giant’s valuation “continues to discount a sizeable related cash flow headwind” amid ongoing uncertainty related to wages and pensions.
Royal Mail and the Communications Workers Union (CWU) have been in talks to end a long-running dispute over pensions, pay and jobs.
In the company’s first half results in November, it warned that it faces increased cost pressures in the second half from the potential impact of industrial action over pay and pensions.
However, last week the group revealed it had made progress in its talks with the CWU.
The company released details of a report by Professor Lynette Harris, who mediated talks between Royal Mail and the Communication Workers Union (CWU). It said the mediation process had been "helpful in bringing Royal Mail and the CWU together to advance the discussions".
“Recent progress toward resolution bodes well along with the accelerating parcel growth, solid GPS profit reflected in first half results,” JPMorgan said.
“Ahead of 2018, RMG shares appear to offer the most robust upside potential followed by still meaningful circa 10% upside from the likes of DSV and ‘core’ postal yields plays, BPOST and PNL.”
Shares in Royal Mail rose 0.36% to 443.80p in morning trading.