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The price target goes down a shade but the rating goes up from 'hold' to 'buy', which tells you most of what you need to know about 2017's share price performance
HSBC thinks management's pension proposals will get the thumbs-up from workers
HSBC has upgraded delivery firm Royal Mail PLC (LON:RMG) to ‘buy’, saying the valuation is compelling, despite the risks involved in holding the shares.
Delivery volumes weakness and industrial relations uncertainties have weighed heavily on share price performance, the banking giant notes, but it argues that the risk/reward ratio is favourable at the current price of 400p or thereabouts.
HSBC’s 12-month price target is 465p, which is 10p lower than its previous target, though it takes no account of the value of Royal Mail’s surplus property, which HSBC reckons is worth 44p a share.
“As comparatives get easier later in this financial year we think that there is a greater probability of results being better than our current forecasts than there is of a further worsening in the rate of decline,” HSBC’s team think.
On the thorny subject of pension negotiations, which may yet lead to the unions taking industrial action in support of a better deal, HSBC said talks are “delicate” but management’s proposed defined benefit cash scheme to replace the gold standard defined benefit offering is “innovative” as, in HSBC’s view, “it mirrors the actual behaviour of the vast majority of members”.
“The CWU, the group’s main union, remains opposed, and has vowed to ballot for strike action should management seek to impose something that has not been agreed; however, in the circumstances we think the balance of probabilities favours a strike-free agreement,” HSBC declared.
With a dividend policy supported by strong cash flows, Royal Mail’s yield of 6% is now one of the highest in the European postal sector and the price/earnings multiple is around 20% discount to the peer group.
The reduction has been prompted by HSBC lowering its volume forecasts for 2018 to 2020 to the bottom end of management’s indicated range of -4% to -6% compound annualised (negative) growth.