Royal Mail share price drops after UBS starts coverage with ‘sell’ advice

on Nov 20, 2013
Updated: Oct 21, 2019
Listen, Wednesday, November 20: Shares in Royal Mail (LON:RMG) fell today after UBS, one of the lead bookrunners for the UK postal operator’s controversial IPO last month, started coverage of the stock with a ‘sell’ recommendation, saying that “the market is over-estimating margin upside.” UBS set its price target for Royal Mail at 450p, 18 percent below its closing price of 550p yesterday, but still well above the IPO price of 330p.

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In a research note to clients, the Swiss bank described Royal Mail as “a company in the midst of transformation,” which has managed to improve productivity, with the UK margin rising to 4.3 percent in 2012/13 from -1.6 percent in 2009/10, on the back of investment in automation and a focus on benefiting from the growth in e-commerce. It added that further productivity and revenue growth can be expected, but there remain risks including, continued letter mail volume declines, the inability to reduce the workforce beyond two to three percent a year, the requirement to invest heavily in parcel automation, and increased competition. “Our key concern is that at the current valuation, the market’s expectations are too high.”

Royal Mail’s share price fell by more than three percent today. It was trading at 534.72p as of 13:29 UTC, down 2.78 percent from yesterday’s close.
**UBS, Goldman Sachs defend valuation**
Bankers from UBS and the other lead bookrunner Goldman Sachs, are today appearing before MPs from the Business Innovation and Skills Select Committee to defend their valuations after intense criticism that Royal Mail’s float price was significantly undervalued to the detriment of taxpayers (MPs to quiz City bankers over valuation row). They are joined by officials from Citigroup, Deutsche Bank, JP Morgan and Panmure Gordon, who were not involved in the sale, but had proposed much higher valuations. According to media reports, JP Morgan suggested a valuation of between £7.75 billion and £9.95 billion, Citi had proposed an upper valuation of £7.3 billion, and Deutsche Bank recommended a range of between £6.4 billion and £6.9 billion. At the end of last month, Panmure Gordon boosted its valuation of Royal Mail to £5.7 billion (Royal Mail share price hits fresh peak as Panmure Gordon lifts valuation).

According to a recent report by the Daily Mail, UBS and Goldman Sachs could see part of their fees deducted if the share price remains significantly above the original offer of 330p that valued the 497-year-old postal service at £3.3 billion (Advising banks in gun over float valuation).
In recent research notes, Bank of America Merrill Lynch and Royal Bank of Canada both put a 580p price target on Royal Mail shares, while Barclays valued the stock at 466p.
**As of 13:23 UTC buy Royal Mail shares at 536.00p.**
**As of 13:23 UTC sell Royal Mail shares at 534.50p.**
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