Royal Mail in share sale warning

Royal Mail is facing a City revolt following a fresh warning from analysts that its valuation has now peaked, triggering calls that shareholders should be looking to sell up already.
Despite conceding the postal operator is making good progress on modernisation, analyst Robin Byde at Cantor Fitzgerald claims estimated earnings – which are 12 times more than other postal operators and nearly 15 times the European logistics sector as a whole – mean Royal Mail shares “are no longer compelling”.
In a note to investors, Byde said: “Royal Mail has made good progress on restructuring but still faces significant challenges. It has powerful brands, an unrivalled network in the UK and with GLS a leading pan-European parcel operator. However, core letter volumes continue to decline sharply and many other operators are fighting for share in the packets & parcels market.
“Costs are being contained and productivity is rising but Royal Mail still needs to invest heavily in automation to lift service quality, efficiency and margins. The many uncertainties around medium-term growth, costs-of-change and capex are reflected in the broad range of forecasts in the market. Following its spectacular post-IPO performance, Royal Mail’s valuation and dividend yield are no longer compelling. Our 2014 annualised dividend yield, at 3.2%, is below the wider FTSE 100, yielding 3.8%.”
Shares, which were sold for 330p hit a peak of 607p late last year, but are already down to 566p, with Byde recommending a target price of 500p.
The move follows a similar call in November by UBS – one of the banks which handled the sell-off – which claimed the market was excessively optimistic about Royal Mail’s prospects.
It said: “We believe the market is over-estimating margin upside. In particular, we believe it will be difficult to accelerate its transformation, given the limitations of the labour agreement.
“To get to the upper end of the 5-10% regulated range (assumed by the market; current 3%) would require acceleration of staff reductions, additional automation and no adverse events.”
In contrast, Goldman Sachs, which helped price the privatisation shares at £3.30 in October, claimed Royal Mail shares would soar past the £6 mark this year, predicting the share price would be £6.10 within 12 months.

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