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Royal Mail gets boost as Citigroup double upgrades rating to 'buy' from 'sell' on parcels lift hopes

29 Apr 2020, 14:06 ... 18283.html

Citigroup’s analysts said: “Since the lockdown, e-commerce volumes have seen a significant boost both in the UK and in Europe"

Royal Mail Group PLC (LON:RMG) saw its shares get a boost on Tuesday as Citigroup double upgraded its rating for the mail delivery firm to ‘buy’ from ‘sell’ highlighting a significant and recent acceleration in parcel volumes during the coronavirus lockdown, as well an attractive and nuanced valuation.

The US bank also raised its target price for the FTSE 250-listed firm to 210p from 150p, with the stock currently trading at 158.45p, up 5.1% on Mondays close.
READ: Royal Mail letters likely to disappoint, Credit Suisse cuts price target

In a note to clients, Citigroup’s analysts said: “Since the lockdown, e-commerce volumes have seen a significant boost both in the UK and in Europe. The evidence is ample. According to BRC data, online non-food sales were up +18.8% for the five weeks ending 4th April. Moreover, Kuehne + Nagel in its Q1’20 results yesterday reported that, ‘(The) Contract Logistics (division) handled twice as many e-commerce shipments as in the previous quarter’.”

The analysts said the relevance of this is that Royal Mail is the leading parcel operator in the UK with more than 50% market share of total parcel volumes. It is also the holder of the majority of the B2C segment both domestically at Royal Mail and abroad at GLS.

“In other words, Royal Mail is acutely exposed to this accelerating e-commerce theme,” they pointed out.

The analysts said they estimate that for every 1% annual increase in volume, Royal Mail’s earnings rise and fall by around 20%.

They added: “Citi’s Q4’20 forecast for parcel volumes is +9% (vs. consensus of c.+6%) and in FY’21 Citi expects +13% (vs. consensus of c.+8%).

“While this only leaves Citi’s forecasts in line with consensus for FY’20 (given cost pressures from FY’20), the FY’21 (full-year beneficial effect) leads us to being +400% above consensus operating profit (albeit with small numbers playing a role).”

Attractive valuation

In addition, the Citigroup analysts noted that Royal Mail stock is down by around 38% in the year-to-date versus its peers which are down around 27%.

They said: “This comes with good backward-looking reason given obvious pressures in letters and advertising mail at a time of lockdown. But we see value at Royal Mail.”

The analysts pointed out that, as an example, and to contextualize Royal Mail’s current £1.5bn market cap and £300mln of net debt, the group’s real estate value alone is around £830mln.

They added: “Moreover, even on a rudimentary DCF valuation for UKPIL, we achieve a valuation for Royal Mail’s UK operations of c.£1.40 per share versus today’s share price of £1.50 (EV/EBIT 5x).

“At the very least, this implies the GLS parcel business is receiving almost free optionality in the shares. And, for clarity, our target price of £2.10 implies a GLS value of a modest 4x EV/EBIT.”

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