Liberum reiterates 'sell' rating on Royal Mail

Analysts at Liberum slightly raised their target price on 'sell' rated postal service Royal Mail Group on Monday, stating that risks to its UK operations outweighed resilience in its European arm, General Logistics Systems (GLS).

Liberum said the outlook for Royal Mail's UK parcels, international and letters (UKPIL) unit was as bad as it had feared, with Covid-19 accelerating previous structural headwinds, but did acknowledge that GLS was proving "surprisingly resilient", leading it to nudge its price target on the group from 105.0p to 115.0p.

However, even as the Covid-19 pandemic already had "a significant impact" on Royal Mail's business, Liberum noted that across both UKPIL and GLS, there had been strong growth in business-to-consumer parcel volumes and although business-to-business volumes were "generally weaker", the group had still seen a net increase overall.

The analysts also highlighted that hopes GLS could be sold or spun off to shareholders had not been fulfilled and that Royal Mail's relationship with the Communication Workers Union was still in the process of being mended.

While Liberum noted that changes to Royal Mail's universal service obligation specification could aid a return to financial sustainability, it said they also risk alternative solutions that do not involve Royal Mail at all.

"We reiterate our 'sell' recommendation, but increase our discounted cash flow-based target price to 115p from 105p on capex cuts and better GLS forecasts," said the analysts.