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Goldman Sachs upgraded shares of Royal Mail to 'buy' on Friday but cut its target price on the group from 360p to 320p due to higher near-term costs.
The New York-based investment bank believes Royal Mail's current share price discounts no improvement in its profitability as, even after its dividend cut, the stock is yielding 7% despite "clear areas of efficiency potential".
GS noted that Royal Mail's capital markets day on Wednesday seemingly signalled a "clear shift of focus" towards the fastest growing part of the business - parcels, where it has begun pursuing disciplined price increases to improve profitability.
Discussing the company's recent switch in focus, GS said: "Royal Mail aims to become a parcels company that also delivers mail, from being a mail company that also delivers parcels."
"With the stock trading on just 9x FY20E P/E, we believe that the risk/reward is significantly skewed to the upside (on our estimates, the stock is trading on just 6x FY22E P/E) and upgrade the stock to 'buy' with a 320p 12-month price target."
The analysts stated that although Royal Mail's profitability had been shrinking in recent years, partly due to weaker-than-expected volume performance in mail, UK top-line "should" return to growth allowing for margin expansion.
GS also highlighted the fact that Royal Mail had increased prices from January 2019, something it believes should "contribute positively" to its top line for the coming quarter.