logo-loader
viewRoyal Mail PLC

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.

Quick facts: Royal Mail PLC

Price: 202.5 GBX

LSE:RMG
Market: LSE
Market Cap: £2.03 billion
Follow

Add related topics to MyProactive

Create your account: sign up and get ahead on news and events

NO INVESTMENT ADVICE

The Company is a publisher. You understand and agree that no content published on the Site constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is...

FOR OUR FULL DISCLAIMER CLICK HERE

Watch

Southern Gold active on the ground in South Korea with multiple rigs and...

Southern Gold Limited's (ASX:SAU) managing director Simon Mitchell tells Proactive London's Andrew Scott they're looking to become recognised as the go-to name for exploration in South Korea.  ''We're now 100% focused on South Korea and I think that's been well received by the market to...

45 minutes ago

2 min read