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Royal Mail is making encouraging progress in crystallising value from its surplus land portfolio but it does not offset struggles in its core business, Liberum analysts have warned
Royal Mail PLC (LON:RMG) has sold a chunk of land at its sorting office in north London to housebuilder Taylor Wimpey PLC (LON:TW. for £193.5mln as it works to cut costs to amid struggles in its letters delivery business.
The company, which has been relegated from the FTSE 100 nearly four years after its privatisation, has agreed to offload six acres of land at its Mount Pleasant site.
It plans to make a “significant further investment” to separate a retained office site from the housing plots, which will cost an estimated £100mln.
The separation of the two sites is expected to be completed by 2021.
Chief executive Martin Gafsen said in a statement that the deal will help it to secure the “long-term future of our key central London operational site”.
Challenges remain in core business, Liberum says
Analysts at Liberum said the valuation of the deal is broadly in line with its assumptions, adding that Royal Mail is making “encouraging progress” in crystallising value from its surplus land portfolio.
“However, it is delivering only modest incremental value that does not offset the challenging underlying fundamentals of the core business,” Liberum said, repeating a ‘sell’ rating and target price of 385p.
“Our overall view on Royal Mail is unchanged. Long term, we see the group as poorly positioned in the parcels market, with growth unlikely to fully offset the secular decline in letters revenue, in our view.”
In the first quarter, the UK division saw underlying revenue fall 1% as growth in parcel revenue failed to mitigate a decline in letters.
Royal Mail said it remained on track to deliver cost savings for the full year in its quarterly results statement.
In the face of its struggles, Royal Mail's shares have fallen more than 15% in the year to date and over 24% in the past 12 months.
SUBSequently Royal Mail has been deoted to the FTSE 250 following the FTSE Russell's quarterly review of its constituents.
Royal Mail tackles rising RPI and spat with union over pensions
Liberum believes that past performance in cutting costs has been good but sustaining this rate of improvement against tough comparatives seems challenging.
“This is especially the case against a backdrop of rising RPI (retail price index, the main benchmark for wage talks) and increasingly combative statements by the CWU (Communication Workers Union) trade union regarding industrial action.”
READ: Potential for strike action over key Christmas period will hit Royal Mail’s profits, says UBS
The CWU has set a 6 September deadline to make progress in talks over the planned end of Royal Mail’s current pension scheme. The scheme will close on 31 March 2018 as Royal Mail said that annual contributions could triple to £1.3bn if no changes were made.
The union has rejected Royal Mail’s proposal for a defined benefit cash balance scheme and a defined contribution scheme.
Shares in Royal Mail dipped 0.54% to 388.40p in morning trading.