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Royal Mail has target price cut by Deutsche Bank as FTSE 100 demotion looms

Deutsche analysts chopped the delivery firm’s target price by 16% to 250p from 300p
Royal Mail has target price cut by Deutsche Bank as FTSE 100 demotion looms
Royal Mail faces significant challenges, with H1 letter volumes down 7% and labour cost pressures across the business

Royal Mail Group PLC (LON:RMG) has had its target price cut by 16% by Deutsche Bank over concerns about the company’s ability to deal with the challenges it faces as it stares down the barrel of demotion from the FTSE 100 index.

The letters and parcels group faces sizeable challenges, with letter volumes down 7% in the first half and significant labour cost pressures across the business.

READ: Christmas spirit could be lacking for Royal Mail as ejection from FTSE 100 index beckons once again

“We see no signs that these (challenges) will abate near term,” Deutsche analysts wrote in a note to clients in which it cut the firm’s target price to 250p from 300p.

“However, we do see a number of levers that management can pull – and perhaps announce at next year's Capital Market's Day in March – to improve the financials of the business. We think the focus should be on UK parcels, international and letters (PIL) to drive out costs and improve service quality.”

The analysts, who rate the group a ‘sell’, believe a significant investment is needed to achieve this and would see it as a negative signal for the company if investment costs were significantly pared back.

The delivery firm is widely expected to get ejected from the FTSE 100 index once again following the latest quarterly indices reshuffle.

The stock only returned to the blue-chip fold in February this year, having spent six months among the mid-caps for the first time since its post-float elevation in 2013.

Royal Mail shares dropped below the 300p level for the first time after it issued a profit warning in October, taking a slump since it hit an all-time peak of 631p in May to 53% and putting well under the 2013 IPO price of 330p.

Shares in Royal Mail were 1.4% down at 303.2p in late morning trade.

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