Royal Mail should get good news in the post from regulator and unions, says broker

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Royal Mail PLC (LON:RMG) is likely to reach an agreement with trade unions to improve productivity, analysts at UBS believe, leading to a reiteration of their ‘buy’ recommendation and an increase to their share price target.

“While the outcome of the negotiations with the unions remains binary, we argue there is more than a 50% probability that an agreement is reached,” the analysts said in a note to clients on Tuesday.

This opinion is based on Royal Mail management’s seemingly improved relationship with the union and a relatively dovish approach from the company with no compulsory redundancies.

Furthermore, the Swiss bank’s number crunchers expect the unions to be “in a position to receive a generous three-year pay deal if productivity improvements can be achieved”.

On the regulatory side, with Ofcom’s UK user needs review by early October, the analysts said they “expect [it] could be positive and support the network cost reduction via five days delivery per week”.

Forecasts were also updated to reflect the largely positive trends shown in the recent trading update as well as the latest retail online penetration trends, which “remain favourable”.

For the UK parcels and letters arm, a GBP213mln underlying loss is forecast for the full year, “to reflect economic uncertainty and potential delays in negotiations with the unions”, with profit margins expected to improve in the medium-term.

Looking at data for the retail industry, UBS noted that European footfall at physical store destinations was around 25% below last year levels in early September, which bodes well for online parcel delivery companies, while Royal Mail is “catching up in terms of using technology to improve user experience” as its smartphone app is the second most downloaded parcel delivery app in the UK and the seventh most downloaded app in the lifestyle category.

Putting it all together, UBS upped its share price target to 304p per share from 215p before.

RM shares were up 3% to 232.6p on Tuesday morning.

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