Royal Mail's mid-term outlook 'highly uncertain', says broker

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Royal Mail PLC (LSE:RMG)’s mid-term outlook “remains highly uncertain” and it is difficult to assess which direction the business could head in going forward, according to analysts at Berenberg.

In a note on Thursday, the broker hiked their target price on the postal carrier to 550p from 355p and retained their ‘hold’ rating, saying that while the firm’s recent first-quarter update had provided “no great surprises”, it had also offered “little clarity on the future direction of travel”.

“Parcel volumes are starting to retrench and letter volumes are rebounding after last year’s exceptional volatility, but the business’s extremely high operating leverage, and substantial uncertainty about what new “normalised” volume levels will be, mean that it is difficult to be at all certain about the direction of travel from here”, Berenberg said.

“In the near term, we think that the rebound of letters is likely to outweigh the slowing of parcel growth, but the mid-term remains highly uncertain, in our view”, they added.

In an update on Wednesday, Royal Mail reported that group revenue in the three months to end June, 2021, grew 12.5% compared to a year ago and by 20.2% over the same period in 2019, although it warned that revenue growth at the company’s GLS parcels business is expected to slow as the year progresses, due to the easing of lockdown restrictions and stronger prior year comparators in the second half.

Shares in Royal Mail were up 3% at 531.8p in early afternoon trading.