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Liberum slashes Royal Mail target price after shock profit warning

Published: 08:01 02 Oct 2018 BST

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Royal Mail's profit warning knocked its shares by 18% on Monday

Royal Mail PLC (LON:RMG) has had its target price cut by broker Liberum after the postal group warned on full-year profit and said productivity improvements had failed to materialise.

The post and parcels delivery firm said on Monday that trading conditions in the UK had been extremely challenging, leading its letters volumes to fall sharply, sending its shares plummeting and wiping some £800mln off its market value.

READ: Royal Mail says UK letters volumes and productivity down, shares plunge

In its statement, Royal Mail said that its UK productivity performance had been “significantly below plan” at 0.1% during the first half and that it expects the full year performance to be significantly below target – at the upper end of its 2 to 3% range.

As a result, it now sees its 2018/19 cost avoidance target lowered from £230mln to £100mln and is implementing a range of short-term cost actions. Given these factors, the company expects group adjusted operating profit before transformation costs to be in the range of £500mln to £550mln on a 52-week basis.

“Yesterday's profit warning was shocking in its scale and timing,” analysts at Liberum wrote in a note to clients.

“First half productivity improved by just 0.1%, leaving the previous full-year target of nearly 3% well out of reach, despite a weak comparative. The £130mln reduction in the current year cost avoidance target drops straight to the bottom line,” they added, cutting its target price to 250p from 415p.

Liberum was sceptical about the company’s plans to grow the dividend given cover by earnings and cash flow is weak.

The broker added that it has cut its forecasts to reflect the current trading trends highlighted in the profit warning. Its new forecast for March 2019 group operating profit pre-transformation costs of £507mln is 22% lower than its previous estimate and consistent with the lower end of management's new guidance range.

This translates into a 30% cut to expected earnings per share for the current year, with 38% cuts to each of 2020 and 2021. The large percentage shift in earnings estimates is a reminder of the high operational gearing faced by Royal Mail in its UK operations, given the low degree of variable costs, Liberum said.

Shares in Royal Mail, which slumped 18% after the profit warning was issued late on Monday afternoon, were 6.6% down at 365.70p in early trade on Tuesday.
 

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