Royal Mail under the cosh after Credit Suisse downgrade

The bank said it expects worsening letter revenue trends and a costly labour deal to render 2018 earnings unsustainable, and it does not expect free cash flow to cover dividends from FY21. It cut its FY18/19/20 EBIT estimates by 5%/18%/31% to £515m, £444m and £382m, respectively.

Credit Suisse said there are two factors behind its view that letter revenue trends will weaken. Firstly, it noted that RBS, Santander and the UK government are acting to cut mail volumes.

"Our data suggest that cost savings from government digitisation initiatives are still to materialise, and history shows that the Danish and Dutch governments' digitisation initiatives coincided with accelerating mail volume declines."

Secondly, it pointed out that internet use is rising fast among adults over 65, reducing the need for letters.

In addition, labour negotiations will add pressure to the stock, with around 3% wage inflation likely.

"Our analysis of labour negotiations around privatisation and changes to pension entitlements in 2013 supports our forecast of a three-year pay deal with annual rises of 3%, versus implied consensus at 2-2.5%. This cuts EBIT by £40-50m per annum in FY19E and FY20E."

At 1000 BST, the shares were down 5% to 370.30p.