Royal Mail Group PLC’s (LON:RMG) dispute with its workers and deep structural challenges could lead to an “irreversible squeeze of profit margins”, says broker Liberum.
Liberum downgraded the letters and parcels group to ‘sell’ from ‘hold’ and cut its target price to 185p per share from a previous 220p.
On Tuesday morning the Communication Workers Union (CWU), which represents the bulk of Royal Mail’s UK frontline workforce, began balloting its members over whether to strike coming into the winter holiday season, with the result expected in early October.
Despite the new deal on pay, pensions and working hours including the four-day working week, ratified in March 2018, Royal Mail’s relationship with its workers has deteriorated with leadership changes and ambitious productivity targets not being met.
Liberum holds that even if workers don’t strike in peak season, the breakdown in the relationship “bodes ill for the delivery of normal business as usual productivity improvements”.
Even with the growth in parcels from the online retail boom, the analysts reckon this is not enough to outstrip the group’s letters losses, which Royal Mail says will slump at a rate of between 4% and 6% in the medium term.
Rising productivity last year allowed the group to mitigate those costs, but Liberum said that productivity “continuing to stagnate” and the four day working week caused a “significant downwards step in margins.”
Share price “at odds” with reality
Shares were trading at 214.8p on Tuesday afternoon, a 2.36% decline on the day that bucks a gentle rally in recent weeks on hopes for boss Rico Back’s “turnaround and grow” strategy.
In its last financial year to end-March, Royal Mail saw profits dwindle 30% to £398mln.
The Liberum analysts wrote: “In our view, the recent share price strength is completely at odds with the deteriorating industrial relations picture and weakening macro outlook, and the valuation wholly unreflective of the structural challenges faced by the group that could lead to a long-term and irreversible squeeze of profit margins.”