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Royal Mail delivers a trading update on Tuesday with a key focus on the performance of its parcels business
Royal Mail PLC (LON:RMG) will be unable to offset a decline in letter revenue with growth in parcel deliveries this financial year as competitive pressures continue to mount, according to Liberum.
Liberum repeated a ‘sell’ rating on Royal Mail and cut its target price to 385p from 400p, saying it expects the post office will continue to lose market share in parcels.
The company, which will update the market on its performance in a trading statement on Tuesday, has seen its parcel business meet fierce rivalry from the likes of Hermes and Yodel.
Adding to the competition, Amazon has built its own network to deliver products it sells.Liberum sees risks to Royal Mail's parcel business
The number of packages and parcels in the UK grew by 65% to 2.8bn between 2012 and 2016, according to a recent report by market research firm, Mintel. In comparison, Royal Mail’s volumes grew by just 8% between March 2013 and 2017.
Liberum said it sees three risks to Royal Mail’s ability to increase parcel revenues enough to deliver long-term earnings growth.
The risks to the parcels business include online retail customers demanding faster deliveries at more predictable time slots, the company’s capacity for delivering larger and heavier items and intense price competition.
Royal Mail has become increasingly reliant on revenue from parcel deliveries as demand for posting letters continues to decline due to the internet explosion.
At its 2017 full year results in May, the group said it expects letter volume declines of between 4% to 6% per year over the medium term and would expect that fall to reach the higher end of the range in the following year "if the current climate of business uncertainty persists".
Liberum cut its earnings per share forecast for fiscal year 2018 by 13% to 35.2p, compared to 44.1p the previous year.Royal Mail changes pension scheme
Royal Mail is also tackling changes to its current pension scheme. The company has said that it will be offering employees a choice between a defined benefit or contribution scheme that would be funded within its current £400mln annual pension contribution.
The postal operator said in April its existing defined benefit pension scheme from 31 March 2018 after finding that annual contributions could more than double to £1bn if no changes were made.
The move followed extensive talks with unions, including Unite/CMA and the Communications Workers Union (CWU).