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JPMorgan downgrades Royal Mail after recent strength
JPMorgan Cazenove downgraded Royal Mail to 'neutral' from 'overweight' due to the recent re-rating in the share price, the lack of positive catalysts ahead and a more operationally challenged period.
JPM, which upped its price target on the stock to 561p from 530p, said the revenue outlook for the company is broadly unchanged, with UKPIL revenue likely to remain around flat over time.
It expects a stronger parcels environment - possibly due to temporary Amazon trends - to broadly offset a weaker letters market. In addition, it argued that incremental parcel revenue growth has a higher variable cost component, such that its ability to fall-through to profitability is more limited.
As far as the cost outlook is concerned, JPM expects the rate of per-hour wage inflation at UKPIL to accelerate from 2.5% in FY18 to around 4.5% in the medium term. UKPIL cost inflation, meanwhile, is expected to accelerate by around 1% as a result of this, requiring approximately £70m of additional annual cost avoidance to hold profits flat over time.
"Combined with the revenue outlook...we believe this is likely to put downwards pressure on profitability over the medium term," it said.
JPM said that on its forecasts, Royal Mail trades on a free cash flow yield of about 7%, which is a similar level to peers.
At 1400 BST, the shares were down 0.5% to 553.40p.
JPM, which upped its price target on the stock to 561p from 530p, said the revenue outlook for the company is broadly unchanged, with UKPIL revenue likely to remain around flat over time.
It expects a stronger parcels environment - possibly due to temporary Amazon trends - to broadly offset a weaker letters market. In addition, it argued that incremental parcel revenue growth has a higher variable cost component, such that its ability to fall-through to profitability is more limited.
As far as the cost outlook is concerned, JPM expects the rate of per-hour wage inflation at UKPIL to accelerate from 2.5% in FY18 to around 4.5% in the medium term. UKPIL cost inflation, meanwhile, is expected to accelerate by around 1% as a result of this, requiring approximately £70m of additional annual cost avoidance to hold profits flat over time.
"Combined with the revenue outlook...we believe this is likely to put downwards pressure on profitability over the medium term," it said.
JPM said that on its forecasts, Royal Mail trades on a free cash flow yield of about 7%, which is a similar level to peers.
At 1400 BST, the shares were down 0.5% to 553.40p.
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Royal Mail (RMG) share price |
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