Royal Mail cut by HSBC and RBC after cost saving objectives missed

RBC cut its rating for the postal service’s shares to ‘underperform’ from ‘sector perform’, reasoning that the company’s shares have not yet reflected amplified risks from missing cost-cutting targets despite having dropped by 19% since a profit warning issued on 1 October.

The profit warning revealed a huge miss in its target for productivity improvement, which rose by just 0.1% against an aim of 2-3%, resulting in the scrapping of an ambition to find £230m in cost savings during 2018.

Royal Mail’s target price was also lowered to 315p from 500p as analysts said that its inability to hit short-term targets “did not auger well” for attempts to catch up to overall aims.

“Starting 2019 so far behind means even greater progress is needed in 2020. The company also needs to counter and catch-up on the accumulated build-up of other inflation and falling letter revenues,” RBC told clients.

Meanwhile, HSBC cut its rating for the outfit’s shares to ‘hold’ from ‘buy’ as it said that the slowdown in productivity is of “significant concern”, particularly because of the company’s history of productivity is strong.

The company’s issues with missing cost saving targets was seen as a result of poor staff morale following a “bruising period” for industrial relations, but HSBC analysts did not think Royal Mail would have had to release a profit warning had it not been for productivity issues.

This conclusion was drawn from the calculation that stronger than expected parcel revenue and parcel growth should offset worse-than-expected letter volume decline of 7%.

However, the banking and financial services company also cut its target price from 552p to 379p, “in view of the significant uncertainties now facing the company and our forecasts for succeeding years.”

“It is hard to build a credible investment case for Royal Mail until there is greater certainty about future cost saving targets and the sustainable level of dividend payments,” said HSBC analysts.

RBC saw the company’s DPS rising by 0.01p per year from a base of 0.24p in 2018, while HSBC saw the increase as between 0.02 and 0.04 per year until 2021.

Royal Mail’s shares were up 3.72% at 351.00p at 1617 BST.