Royal Mail shareholders are being urged to flog off their shares urgently by UBS – one of the main investment banks that handled the £3.3bn sell-off – which now claims the company’s value has peaked.
In a research note issued by UBS – and leaked to Sky News – the company cites the current negotiations with unions over pay and conditions, as well as the slow pace of automation as reasons for concern
UBS analysts set a share price target for Royal Mail of 450p, about 20% below the level at which the shares closed yesterday, but more than one-third higher than the 330p at which ministers agreed to privatise it. The bank also claimed the market was excessively optimistic about Royal Mail’s prospects. It said: “We believe management has executed well on improving productivity, with the UK margin rising to 4.3% in 2012-13 from -1.6% in 2009-10. We expect further improvements, due to productivity and revenue growth.
“However, with Royal Mail’s share price up 69% since the IPO (versus 7% to 32% for peers), 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.”
UBS said the stock market faced disappointment over the pace of automation in Royal Mail’s parcels business.
“[Royal Mail]’s future growth will be highly dependent on which parcel size grows. We also believe there is a growing disconnect between parcel and internet retail growth, with the rise of “click and collect” and other such hybrid models reducing the need for parcels,” it said.
The move comes as the raft of investment banks are set to be grilled by MPs sitting on the Business, Innovation and Skills Select Committee today (November 21), as predicted last month.
Investment bankers from UBS and Goldman Sachs will appear alongside those of Citi, Deutsche Bank and JP Morgan, each of which argued for far higher valuations of Royal Mail when pitching to the Government to win the privatisation work earlier this year.
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