Berenberg lowers target price on Royal Mail

Berenberg said uncertainty remained the main driver of the shares for now, with shares down roughly 12% following its recent earnings despite Royal Mail effectively being the only listed mid-cap postal business in Europe not to cut guidance for the coming year and it being the cheapest in the sector and the worst performer year-to-date.

The German bank stated a lack of visibility about Royal Mail's union pay deal in the UK continued to dominate the narrative for the stock, even though it thinks that an "extremely adverse outcome" has now been more than priced in.

Although Berenberg, which reiterated its 'buy' rating on the stock, lowered its price target on the stock, it still thinks that over 90% upside to the shares remains once the sentiment overhangs can be worked through.

"With the shares trading on just 5.4x P/E and 5.3x EV/EBIT for CY22E (versus historical averages of 11x and 9.5x respectively), we think that a very negative scenario is priced in – the market is clearly unwilling to give the business the benefit of the doubt until there is more clarity on the pay deal in the UK," said the analysts.

"Even with a very negative result for the negotiation (eg a c10% pay deal with little mitigation), we think the shares would be trading on c7x EV/EBIT – still a 25% discount to history, despite the improvements made to the business over the past two years."

Reporting by Iain Gilbert at Sharecast.com