Royal Mail's execution of pensions and pay deal with CWU crucial, says UBS

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Royal Mail has reached an agreement in principle on pensions and pay with the CWU

Royal Mail PLC’s (LON:RMG) pensions deal with the Communication Workers Union (CWU) seems reasonable for both sides but the implementation of changes will be crucial, analysts at UBS said.

The postal operator last week announced that it had reached an agreement in principle with the CWU on pensions, pay, a shorter working week, culture and operational changes. Royal Mail expects the changes will improve productivity.

UBS said it assumes Royal Mail can offset the cost of the fewer working hours through efficiency savings but added that “if this proves not possible then forecasts could be impacted”.

“The new pension scheme appears a reasonable compromise, with the total cash cost remaining stable but with a better package for newer employees,” it said.

UBS maintained a ‘hold’ rating on the stock and raised its target price to 528p from 437p.

Royal Mail expects to deliver adjusted group operating profit before transformation costs for 2017-18 of at least £680mln, compared to UBS forecasts of £692mln.

“We now value Royal Mail on 12x price-earnings ratio (was 10x) reflecting: higher visibility from labour agreement and better operating performance.”

Share fell 2.3% to 501p around noon.