RM parcel business targets look achievable, says Nomura

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Royal Mail parcel business targets look achievable, says Nomura

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Newly floated UK postal service Royal Mail (LON:RMG) has financial targets, which look "eminently achievable", reckons Japanese broker Nomura, though it gives the stock a "neutral" rating.

Analyst Mark McVicar reckons its hopes for margin growth at UKPIL - its letters and parcels delivery arm - are achievable, as are its targets for the group's GLS division, which operates in continental Europe.

The company has the Universal Service Obligation in the UK, requiring it to deliver to every address in the country, six days a week for letters and five days for parcels, notes the analyst.

"The company‟s plans to take UKPIL margins to the middle of the allowed regulatory range of 5-10% by FY2017 and improve those at GLS look achievable," he says.

"As always, it is the shape of the curve of improvement that is key, and we look to the interims on 27 November for an update on progress and the short- and medium-term outlook for earnings, cash flows and dividends."

On Wednesday this week, UBS issued a 'sell' note on the shares.

It noted that with the group's share price up 69% since the IPO (versus 7-32% for peers), it believes the market is over-estimating margin upside.

"In particular, we believe it will be difficult to accelerate its transformation, given the limitations of the labour agreement. To get to the upper end of the 5-10% regulated range (assumed by the market; current 3%) would require acceleration of staff reductions, additional automation and no adverse events,” said the Swiss bank.

It added it was positive on parcel growth, but noted that the UK market was highly competitive.
Broker Nomura has a price target for the shares of 400p.