Broker tips: Royal Mail, Chemring

Royal Mail surged on Wednesday as JPMorgan Cazenove upgraded the stock to ‘overweight’ from ‘neutral’ and lifted the price target to 374.0p from 253.0p, saying it sees a potential strong improvement in trading over the next 18 months, due in part to an improved revenue outlook.

"In our view, this revenue outlook may also ease trade union pressure, with somewhat less need to find efficiency savings," JPM said as it lifted its FY21 and FY22 operating profit forecasts by 300% and 11%, respectively.

It now forecasts 28% UK parcel revenue growth in FY21, up from a previous estimate of 22% growth. JPM also expect GLS revenue to remain strong.

"Parcel price/mix may also be helped by the current environment, due to shortages in sorting capacity," it said. "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."

JPM noted that the ongoing CWU negotiations remain the largest area of uncertainty, with progress appearing far behind schedule but noted that as 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.

Analysts at Berenberg slightly raised their target price on aerospace and defence firm Chemring from 300.0p to 320.0p on Wednesday, stating cash was "king".

Berenberg said Chemring's post-close trading update was yet another positive touch-point with the market, as cash performance continued to track ahead of expectations and full-year guidance was confirmed at the upper end of current consensus, while the group's order book provided "excellent visibility" for 2021 and beyond.

"Yet again, all this highlights the ongoing resilience and improving quality of the underlying business," said the analysts.

The German bank, which also reiterated its 'buy' rating on the stock, stated that it remained "positively disposed" towards Chemring on the back of higher cash and lower net debt forecasts.

"Indeed, we continue to see upside potential to medium-term estimates given enduring momentum, with the group's low gearing (we forecast 2020 net debt/EBITDA of 0.7x) offering capital deployment optionality, in our view."