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"Although the share price has fallen significantly (c-25% since the update), our estimates for the current year are falling by a similar amount," UBS said
UBS has slashed its price target for Royal Mail PLC (LON:RMG) after last week’s profit warning by the letters and parcels delivery group.
The new price target is 354p, down from 528p, but such has been the sell-off in Royal Mail’s shares (down to 345p from 477p at the end of September) that the rating remains at ‘neutral’.
At the current price, UBS said the shares are not expensive but it sees better value elsewhere.
“Given the extent of the disappointment in the trading update (UK productivity +0.1% versus targeted 2-3%) we believe a rebuilding process will be required before the market can start to become comfortable as to what level of cost-cutting (and therefore long-term margin) is sustainable,” the Swiss bank said.
“The situation at GLS [General Logistics Systems] should be more transient, with prices set to rise in its largest market, Germany next year and the tightening labour market likely to result in price rises in other countries,” it added.
Based on UBS’s earnings projections for 2020, Royal Mail is trading on a forward earnings multiple of 11, which is just below the midway point of the 9-15 range of its sector peers.
The dividend yield, at around 7%, is described by UBS as “reasonable”; for most stocks, a yield that high would imply a dividend cut was on the way but in Royal Mail’s sector, where yields range from 4% to 9.5%, it is not that exceptional.
“We see limited risk to the dividend in the short-term, given it costs £243mln, implying that RMG needs to generate adj EBITDA of ~£850mln to cover it on a cash basis: in FY2019 we are forecasting £960mln. This risk of a cut is only likely if margins in UKPIL [UK Parcels, International & Letters] take another sustained step down, at which point a regulatory review would be likely, given EBIT margins would be significantly below Ofcom's 5-10% desired range,” UBS said.