The better parcels revenue trends saw many brokers trim their forecast losses and so increase upgrade their share price targets – though there remained a wide divergence.
Goldman Sachs, which has a ‘buy’ rating on the stock, upped its share price target to 290p from 230p. UBS, another fan, kept its target at 215p.
Liberum raised its target to 165p from 115p but kept its ‘sell’ recommendation in place, as did Berenberg, which hiked its target to 137p from 100p.
“We believe it is important to keep sight of the significant structural challenges faced by the group,” said Liberum analyst Gerald Khoo.
“The size of the upgrade to forecasts perhaps masks the fact that we are still expecting a substantial fall in profits at both the UK divisional and group levels.”
This week’s update was a “brief reprieve” for the shares after a long period of operational weakness, said Berenberg’s William Fitzalan Howard, though the cash burn remains severe and long-term solutions “remain elusive”.
Some analysts noted that signs that recent strength is moderating, with growth in UK parcels volumes of 34% over five months but slowing from the 38% growth in the first quarter, while volume growth at the GLS overseas parcels arm slowed to 19% from 22% in Q1.
The lack of overall revenue growth because of continuing letters declines means that margins continue to be squeezed as cost inflation is not fully offset by productivity improvements, Khoo said, as parcels are more expensive to handle compared to letter sorting.
“The bear case on Royal Mail is now less clear cut,” he admitted, with better recent trading relieving some of the short-term pressure.
“However, we still see significant structural challenges in the UK. These will require substantial changes to working practices, which in turn will require union and employee consent and cooperation.”
Relying on unions and regulator
Analysts at Peel Hunt said it was disappointing that while discussions with unions have been progressing no agreements have been reached.
Initial expectations from unions had been for an agreement by the end of July.
UBS noted that RMG management is also asking regulator Ofcom for flexibility to deliver what customers want in a rapidly changing market when the Universal Service Order (USO) is reviewed.
Having surveyed ‘thousands’ of customers about what they want from postal services and carried out many sessions with colleagues to see how they think the USO may need to change for the future, the main insights are:
- Customers want to retain the ‘one price goes anywhere’ principle of the USO.
- Customers want more ways to send letters and parcels, via online postage or parcel postboxes, and the company is examining now whether there is enough customer demand for a seven-day parcel service
- Third, customers, especially businesses, want an affordable next-day letters service.
Ofcom is expected to announce its conclusions on ‘user needs’ around the end of September or early October, alongside a wider regulatory framework.
Securing major changes is far from guaranteed, said Liberum’s Khoo, adding that the current market valuation does not adequately reflects “substantial structural challenges”.
For Berenberg’s Howard and his colleagues long-term solutions “remain a moon-shoot”.
“While we think that [changing the regulatory settlement to help restructure costs and focus more on parcel delivery] is the right approach, we caution that any changes will probably take years to negotiate and implement, and that it is unlikely to be a panacea.”