Broker tips: Royal Mail, C&C Group, Britvic

Analysts at Liberum raised their target price on Royal Mail from 480.0p to 560.0p on Wednesday but warned that the impact of an upcoming reduction to the working week was being underestimated.

Following a lengthy dispute over pay and working hours, Royal Mail finally reached an agreement with unions last December. As well as a pay rise, the deal includes a one-hour reduction to the working week, from 38 to 37 hours, to come in by October 2021 at the latest.

Liberum, which reiterated its 'hold' rating on the stock, believe the market has underestimated the challenge of offsetting the forthcoming one-hour reduction.

"The last such move, in October 2018, was the catalyst for a collapse in profits that has only been arrested by the pandemic parcel surge. While the latter has given Royal Mail breathing room, we await details of how management intends to deliver rapid and unprecedented improvements in productivity to offset the next working week cut," said Liberum.

The analysts also noted that the previous reduction had required a 2.5% improvement in productivity to neutralise its impact.

"However, there was also underlying cost inflation to deal with. Not only was the required 4-5% improvement in productivity beyond what the UK division was capable of achieving, but also achieved productivity fell close to nil. Profits collapsed, even as revenue continued to grow."

Berenberg upped its stance on shares of drinks company C&C Group to ‘buy’ from ‘hold’ on Wednesday, hiking the price target to 345p from 181p as it pointed to "catalysts galore" for the branded portfolio.

The bank noted that C&C - which owns the Bulmers and Magners brands, among others - is the only name in its beverages coverage trading below pre-pandemic levels, lagging its closest peer in terms of performance by 14%.

"This seems peculiar to us given the brewer is on the cusp of some of the strongest years of growth it has ever had, in our view.

"We think there is a perfect storm of macro and micro tailwinds arriving for the group and sit 10% above consensus for FY23 EBIT pre-exceptionals; however, this is still circa 7% below pre-pandemic levels."

Berenberg said consensus, which is around 20% below pre-pandemic levels for FY23 EBIT, "vastly" underestimates the opportunity ahead, particularly given C&C is 80% exposed on group net sales to the recovering higher-margin on-trade channel.

Citi increased its price target for Britvic shares after the soft drinks group's first-half results beat expectations.

The maker of Tango, Robinsons and mixers reinstated its dividend on Tuesday and reported revenue ahead of forecasts. Britvic also said the second half had started well.

Citi increased its forecast for second-half organic revenue by £20m and upgraded its estimate for annual earnings per share by 1%. Co-packing costs and increased investment in the second half left Citi's estimate for full-year margins broadly unchanged.

The bank stuck to its 'buy' rating and increased its price target for Britvic shares to £10.70 from 980p. It noted "encouraging momentum" with "all eyes on reopening trajectory" after restrictions on UK restaurants and bars were relaxed.