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Royal Mail may struggle to offset falling letter revenues with parcel growth, says analyst

19 Jan 2018, 15:58

http://www.proactiveinvestors.co.uk/com ... 90294.html

Royal Mail PLC (LON:RMG) has been able to offset declining letter revenues with growth in parcels but Liberum is not convinced this can be sustained as comparatives toughen.

Liberum left its rating on the stock at ‘sell’ but lifted its target price to 395p from 370p and raised its earnings forecasts by 4-6% after the company provided an improved outlook on letters.

The postal service operator on Thursday said it expects addressed letter volumes to be in the middle of the 4-6% decline range it previously forecast for the full year. It was previously seen hitting the worse end.

However, Liberum said long-term concerns persist, including the challenge of growing parcel revenue fast enough to offset the fall in revenue from letters.

Another key concern for the broker is productivity amid Royal Mail’s dispute with unions over its plans to replace its defined pension scheme.

"We remain cautious on pay and productivity, with a difficult industrial relations environment and headwinds created by the growth in parcels," it said.

Royal Mail must address the headwinds resulting from growth in parcels, which requires more handling, Liberum said.

The company also needs to deliver continuous improvements to offset underlying cost inflation, most notably related to staff, which account for nearly 70% of operating costs in the UK parcels and letters business.

"Potential moves to shorten the working week would only add to this headwind, as would any additional pensions costs required to sweeten the transition from the soon to be closed defined benefit scheme,"Liberum said.

Shares dipped 0.11% to 462.7p in late morning trading.

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