Liberum starts Royal Mail at sell, says parcels market no panacea

Liberum initiated coverage of Royal Mail at ‘sell’ with a 360p price target, saying its recommendation is predicated on the long-term decline in letter volumes continuing and not being offset by growth in the parcels market.

The brokerage said parcel growth is likely to favour RMG’s competitors. It sees the fastest-growing segments of the parcels market being premium offerings where Royal Mail is not as strong compared with the slower deferred market.

It noted that Amazon’s creation of an in-house delivery capability has also cut market growth and seems unlikely to be reversed.

As far as the company’s cost cuts are concerned, it expects the savings to barely offset the decline in revenue, with even this dependent on the next collective bargaining deal with the trade unions.

Future pension provision will also have to be agreed, with some risk of a one-off contribution or higher ongoing costs, said Liberum.

In addition, it said the uncertainty over Royal Mail's future regulation, which is currently being reviewed by OFCOM, presents asymmetric risk, with no change being the best scenario but a more onerous regime possible.

“Although the group trades at a discount to its European national postal operator peer group, we consider this discount to be warranted by the modest growth outlook and risks faced by Royal Mail.”

At 1053 GMT, RMG shares were 1.8% lower at 435.20p.