Berenberg upgrades Royal Mail, says risks are more balanced

The bank noted that despite a severe hit to mail volumes, Royal Mail has been relatively successful during the Covid-19 pandemic, with a surge in e-commerce benefiting both the UK division and its European business, GLS.

"With relations with the UK employee unions de-risked for the moment and online shopping likely to continue apace at least until the vaccine is more widely rolled out, we envisage limited further downside risks in the near term," it said.

Berenberg said the latest lockdowns are likely to provide a short-term boost for the company.

"The resumption of tighter Covid-19 restrictions in the UK in December has likely benefited the parcel operations as even more Christmas shopping moved online,” it said, adding that in the year to November, the business had already achieved revenue growth of £380m year-on-year - the bottom end of the guidance range for the full year.

"Given that we expect restrictions to persist through the company’s Q4, operational momentum is likely to continue for the moment."

Nevertheless, Berenberg said it remains sceptical about the ability of the UK business to achieve substantial productivity improvements without sweeping headcount reductions, while letter volume declines are likely to remain remorseless for some time .

"These headwinds are likely to build over time, but we think they are likely to be overshadowed by near-term momentum for the next few months."