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Two brokers up target prices for Royal Mail following confirmation of pensions and pay deal with union

02 Feb 2018, 12:13

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Analysts at Deutsche Bank raised their target price for Royal Mail to 440p from 359p, noting that the terms and conditions of the union agreement are “broadly as expected”

Royal Mail delivery
Elsewhere, analysts at Liberum Capital hiked their target for the FTSE 250 listed firm to 450p from 395p after hiking their estimates for the group
Royal Mail Group PLC (LON:RMG) saw its shares tick higher as two City brokers raised price targets for the mail delivery group following confirmation on Thursday it had reached agreement in principle with the Communication Workers Union (CWU) on a pensions and pay deal.

However, both still retained ‘sell rating on the FTSE 250-listed firm’s stock, while another broker cut its rating for the firm, and a fourth started coverage neutrally.

Analysts at Deutsche Bank raised their target price for Royal Mail to 440p from 359p noting that the terms and conditions of the union agreement are “broadly as expected” and “guidance for FY 2017/18 above the market”.

In a note to clients, they said: “In our view the plan is broadly as expected and in-line with the recommendations set out by the mediator last December.

“On pensions, the company is able to continue to pay annual cash contributions of around and £400m and wage inflation for 2017/18 and 2018/19 of c 2.5% and 2.4% is slightly better than market expectations of around 3%.”

Elsewhere, analysts at Liberum Capital hiked their target for the FTSE 250 listed firm to 450p from 395p after hiking their estimates for the group, although – like Deutsche Bank - they also maintained a ‘sell’ rating on the stock.

“Steep productivity mountain to climb longer term”
In their note to clients, the Liberum analysts said: “The details of the pay, pensions and productivity agreement with the Communications Workers’ Union offer a mix of encouraging short-term dynamics but a steep productivity mountain to climb longer term.

“The pensions cash costs were in line with current levels. The pay deal was more moderate than we had assumed, resulting in higher forecasts. The trade-off is a shorter working week, but substantial productivity improvements are required to neutralise this.”

However, they concluded: “We remain cautious on what can be achieved against a toughening base and adverse parcels dynamics.”

“Balanced risk/reward profile”
Meanwhile, French broker Societe Generale initiated coverage on the UK mail delivery firm with a ‘hold’ rating and price target of 480p, saying that overall it believes the stock offers “a balanced risk/reward profile”.

Its analysts said: “An attractive FCF yield, GLS’s eurozone exposure, and a discount vs peers are decidedly appealing, but declining mail volumes and the highly competitive UK parcels environment make RMG’s home market unattractive – with the full Brexit effect yet to come.”

They added: “For the pensions deal, although fears of an excessively punitive burden have eased, we still need details.”

And analysts at HSBC Securities downgraded their rating for Royal Mail to ‘hold’ from ‘buy’ in a note today, on valuation grounds following the union deal, with an unchanged target price of 525p.

In late morning trading on Friday, BT shares were changing hands at 499.5p, up 0.6% on Thursday’s close.


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