Royal Mail shares fall again as brokers issue a downgrade to sell amid rising cost pressures and weak guidance
- Peel Hunt has cut its target price on Royal Mail to 307p from 500p per share
- Royal Mail has raised prices for letters and parcels in response to rising costs
- Shares of the postal giant have fallen by more than a third in the last 6 months
A major investment broker has downgraded Royal Mail to “Sell” after the company revealed falling earnings and weaker forecasts.
Small and mid-cap specialist Peel Hunt has advised investors to sell rather than buy shares in the postal services giant, cutting the price target for the group to 307p from 500p a share.
Royal Mail shares continued that downward trend on Tuesday, falling 3.4 percent to 320.7 pence by late afternoon, meaning its value has fallen by more than a third in the last six months.
Peel Hunt has advised investors to sell rather than buy shares in the postal services giant, lowering the target price for the group to 307p
Peel Hunt said that while the company recently had an “excellent year” of results, it was increasingly affected by lower profit margins in both its UK and General Logistics Systems (GLS) businesses.
These were driven by rising parcel delivery costs and a 10.2 per cent drop in domestic parcel volumes at its UK arm.
Royal Mail has increased the prices of letters and parcels and plans £350m in cost savings in response to rising charges.
But Peel Hunt warned that squeeze on disposable incomes would likely lead to a decline in non-essential purchases.
In addition, the UK government is reducing spending on Covid-19 testing kits, which are a key source of income for the courier in the pandemic era and are no longer free for most people in England and Scotland.
In addition, the number of international Royal Mail parcel deliveries has fallen by 42 per cent over the past year and Peel Hunt expects this to fall by a further 8 per cent in 2022.
The investment broker has lowered forecast for Royal Mail’s domestic parcel volume in the UK from zero to a 10.5 per cent decline and expects the group’s addressed letter volume to fall by 8 per cent, compared with -2.2 per cent previously.
Financially, it has cut its revenue outlook for the company by about £700m, largely due to an expected drop in UK sales, and its net profit guidance by about 40 per cent to £362m.
Forecast: Peel Hunt has cut its Royal Mail revenue forecast by around £700m, largely due to an expected drop in UK sales, and its net profit forecast by around 40 per cent
Alexander Paterson, Analyst at Peel Hunt said: “Unfortunately, a weakening consumer environment combined with inflationary pressures and a domestic business with a limited rate of change makes for an extremely challenging future.
‘We are trimming forecasts significantly as high operating leverage means lower revenues cannot be fully offset by cost avoidance and risk further downward estimates moves.’
Royal Mail’s latest downgrade comes after investment banks Liberum and Hamburg-based Berenberg Bank lowered their price target on the deal, although only the former changed its Royal Mail rating to sell.
Many analysts are now expecting Royal Mail to be downgraded to mid-cap FTSE 250 in the next reorganization of listed companies on the London Stock Exchange after the sharp drop in share price.
Susannah Streeter, Senior Investment and Markets Analyst at Hargreaves Lansdown, said: “Royal Mail recovered quickly in 2021 but recent share price weakness could see it fall out of the FTSE 100 as it finds itself back in the drop zone.
“Some investors appear to think that pandemic performance has now stalled with package counts falling, but while volumes have declined from last year’s highs, they appear to be rebasing crucially to much higher levels than pre-pandemic levels.
‘Royal Mail’s accelerated modernization trajectory has also boosted profitability and the move to greater automation should give the company more agility to handle future peaks and troughs in demand.’
Royal Mail shares fall again as broker issues a downgrade to sell
Source link Royal Mail shares fall again as broker issues a downgrade to sell