Proactive Investors - Run By Investors For Investors

Low UK productivity “biggest challenge” for Royal Mail, says Jefferies

In a note, the New York-based broker said the group’s UK productivity was 50% below the sector average, resulting in profitability that was 70% below average
Postal worker and post box
Jefferies added that a risk of re-nationalisation was likely to keep any investors on the sidelines

The biggest challenge facing FTSE 250 post carrier Royal Mail PLC (LON:RMG) is its low productivity in the UK according to analysts at Jefferies, who on Monday cut their target price for the firm to 170p from 220p.

In a note, the New York-based broker said the group’s UK productivity was 50% below the sector average, resulting in profitability that was 70% below average.

READ: Royal Mail upgraded to ‘hold’ by Liberum on “improved” strategy, but broker cautions on execution risks

Royal Mail’s five-year turnaround plan to boost profitability, unveiled at its full-year results in May, is seeking to reorient the business to be more focused on parcel delivery as well as diversifying its international business.

As part of an effort to fund the restructuring, the company has said it will cut its total dividend for the current year to 15p per share from 25p per share the year before.

However, Jefferies said the company’s target improvements in productivity were back-end loaded and “unlikely” to mitigate rising inflation in people costs, which are expected to increase by over 5% in the near term following a labour agreement last year to reduce the working week to 37 hours.

The broker said an expected acceleration in top-line growth to 2%-3%, with a return to growth from the UK parcels and letter division, could support profitability, but this was dependent on a number of “uncertain” external factors such as Brexit, parcel overcapacity and increasing e-substitution (using electronic communication instead of physical mail).

Overall, Jefferies' analysts were “cautious” on Royal Mail and reiterated their ‘underperform’ rating on the stock alongside the target price cut, citing increasing near-term margin pressures and a risk of re-nationalisation that was likely to keep any potential investors on the sidelines.

The target cut follows a similar move by analysts at Liberum in mid-May, who chopped their target price to 185p from 240p saying that there could be share price upside if the turnaround was successful, though adding that things would get worse before they got better.

Royal Mail shares were sluggish in lunchtime trading on Monday, down 2.1% at 200.8p, albeit 15% above Jefferies new target price.

View full RMG profile View Profile

Royal Mail PLC Timeline

Related Articles

Investment papers and laptop
May 07 2019
The investment firm focuses on providing consultancy services to universities and other research organisations to help them commercialise any intellectual property arising from their research
drill rig
June 27 2019
Fleet numbers around 91 rigs currently, which the company estimates is among the youngest in the industry.
Stobart
May 31 2019
"Stobart Group has a clear focus on developing infrastructure assets in the aviation and energy sectors," chief executive Warwick Brady said.

© Proactive Investors 2019

Proactive Investors Limited, trading as “Proactiveinvestors United Kingdom”, is Authorised and regulated by the Financial Conduct Authority.
Registered in England with Company Registration number 05639690. Group VAT registration number 872070825 FCA Registration number 559082. You can contact us here.

Market Indices, Commodities and Regulatory News Headlines copyright © Morningstar. Data delayed 15 minutes unless otherwise indicated. Terms of use