Credit Suisse wary of M&A expectations building at Royal Mail

Analysts at Credit Suisse hiked their target price on shares of Royal Mail based on their expectation that the firm´s management would be successful in finding the necessary efficiency gains to keep earnings flat.

In a research report dated 31 May, analysts Neil Glynn and Julia Pennington also referenced Royal Mail´s strong finish to its last financial year and how the company appeared increasingly comfortable with the competitive landscape in the market for parcels delivery.

On the basis of the above, they now estimated earnings before interest and taxes (before transformation costs) would reach in between £729m and £748m over the three fiscal years to the end of 2019.

However, whereas the analysts judged that financial markets were now more comfortable with the shares´ 14.5% outperformance versus the Footsie in the last three months, they added they were “wary of potential M&A expectations building”.

It would be difficult for a tie-up with PostNL to deliver value and the ownership structures at key competitors were a hurdle to possible transactions (DPD owned by La Poste, Hermes by otto group, Yodel 5%-owned by Amazon, and TNT owned by Fedex), Glynn and Pennington said.

Further parcel consolidation, on the other hand, especially in the fragmented UK market, would be helpful, they added.

Credit Suisse raised its target price on the shares by 11% to 559p, representing a 30% discount to DP DHL in terms of their relative EV/EBITDA multiples (enterprise value-to-earnings before interest, taxed, depreciation and amortisation).

Nevertheless, Royal Mail´s three-year average free cash flow yield was a less attractive 5.4% as a result of the cash requirements that restructuring efforts would entail, the broker said.

Credit Suisse kept its recommendation at ‘neutral’.