Royal Mail upgraded to 'sector perform' from 'underperform' by RBC

Royal Mail’s shares gained on Monday after RBC Capital Markets raised its rating on the stock to ‘sector perform’ from ‘underperform’ and lifted its target price to 525p from 445p.

The postal delivery service last week reported a 33% drop in full year pre-tax profits to £267m as UK revenue fell 1% to £7.6bn. Letter volumes dropped 3% while parcel deliveries rose 3%.

RBC said it sees “modest recovery in the parcel price/mix as the company becomes more volume selective”.

The broker said the summer/autumn season should see greater certainty emerge on the direction of future wage inflation, cash pension costs and more detail from Ofcom on its review of the regulation of the company.

RBC said with stability on these points, Royal Mail will be free to increase focus on efficiency efforts that might improve the logistics, sorting and delivery processes.

RBC lifted its earnings before interest and tax forecasts by 1% for fiscal years 2017 and 2018 – “based on a presumption of a competitive parcel market pricing closer to the five-year median price/mix seen at Austrian Post, DP DHL, CTT, Post NL and Swiss Post”.

Shares rose 3.58% to 509.50p at 1006 BST.