Berenberg upgrades Royal Mail to 'buy'

Berenberg stated that after "several violent swings over the past few years", many investors understandably viewed Royal Mail shares with trepidation.

However, the analysts stated that with the stock trading on "extremely low multiples" and headwinds being "very well flagged", they now think the risk/reward scenario appears to be "more attractive" on a 12-24 month view than they had ever seen it before.

The German bank highlighted that near-term risks were also to the upside, with any increase in Covid-19 pandemic restrictions through the winter likely to benefit both its UK and European businesses, with cost inflation largely in check for the meantime.

Berenberg also raised its target price on the stock from 530.0p to 650.0p.

"Although we have never thought the company was very likely to sell GLS, we do think that it should provide the group with some valuation backing – our intrinsic (multiples and DCF) valuation for the division is 324.0p – circa 66% of the current share price. Post-Covid-19 we think that valuing the UK business for such a low multiple (5x EV/EBIT) is too harsh."