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Royal Mail upgraded by JPMorgan as UK revenue growth reduces trade union pressure

Ongoing negotiations with the CWU still remain the largest area of uncertainty, analysts said, with progress "far behind schedule"

Royal Mail PLC -

Royal Mail PLC (LON:RMG) has been upgraded by JPMorgan Cazenove as the outlook for revenue is expected to ease the pressure to find savings in its trade union negotiations.

Key to the change of heart, the letter and parcel group’s previously expected a material slowing in parcel volumes in the second half, which analysts think is now “unlikely, given the prolonged impact of COVID-19 on shopping habits”.

After UK revenue was flat for the five previous years before 2020, JPMorgan now forecasts 1-2% annual growth “going forwards”, with UK parcel growth of 28% growth in the year to end-March 2021, up from 22% previously, while the number crunchers also expect revenue from the GLS overseas parcels arm to remain strong and for parcel price mix to perhaps also be helped by extended lockdowns leading to shortages in sorting capacity.

“We also expect the recent launch of parcel returns service, and potential volume from COVID-19 testing may benefit parcels, though we do not forecast this.”

This return to UK top-line growth, helped by the increased revenue weighting of parcels, “should reduce pressure on cost savings, and may help to improve the trade union relationship,” the analysts said in the note to clients on Wednesday.

Ongoing negotiations with the Communication Workers Union (CWU) still remain the largest area of uncertainty, they added, with progress appearing to be far behind schedule as Royal Mail is thought to be trying to create a greater link between wage increases and cost savings.

“While this will be subject to negotiation, the CWU does not appear willing to use industrial action during the COVID-19 pandemic. This may be positive for Royal Mail’s bargaining position.”

JPMorgan lifted its rating to ‘overweight’, having hiked its rating to 'neutral' a few weeks ago, and upped its share price target to 374p from 253p.

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Price: 486.1 GBX

Market Cap: £4.86 billion

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