Royal Mail surges on JPMorgan upgrade to 'overweight'

Royal Mail surged on Wednesday as JPMorgan Cazenove upgraded the stock to ‘overweight’ from ‘neutral’ and lifted the price target to 374p from 253p, 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. The bank lifted its FY21 and FY22 operating profit forecasts by 300% and 11%, respectively.

"The primary change in forecasts is on parcel volume, with Royal Mail’s previous guidance expecting a material slowing in H2, which we think is unlikely, given the prolonged impact of Covid-19 on shopping habits," it said.

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.

"We believe that Royal Mail has a series of objectives from the talks, with the key one being a greater link between wage increases and cost savings. While this will be subject to negotiation, 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."

At 0855 GMT, the shares were up 8.4% at 253.33p.