Royal Mail share price: Valuation seen under pressure amid pension talks

Royal Mail Group’s (LON:RMG) valuation is threatened by the company’s pension issues, analysts at UBS have cautioned. The comments come with the privatised postal services group currently facing labour negotiations with its main union, the Communication Workers Union.

Royal Mail’s share price has been steady in today’s session, having added 0.25 percent to 490.10p as of 09:57 BST, slightly underperforming the benchmark FTSE 100 index which currently stands 0.49 percent higher at 6,384.72 points. The group’s shares have added just under 10 percent over the past year, and are up a little over 10 percent in the year-to-date.
Analysts at UBS reiterated their ‘neutral’ rating on Royal Mail on Friday, while hiking their price target on the stock by 8p to 488p. The analysts, however, see the group’s valuation under threat due to the pension situation at the company, which UBS argues ‘cannot continue’ on account of the difficulty in keeping the scheme open. Royal Mail’s pension scheme currently costs the company £350 million a year in cash contributions to the defined benefit (DB) scheme.

“We believe the market is pricing in the continuation of the current cash cost, given RMG trades more on free cash flow yield than headline earnings,” UBS analyst Dominic Edridge said, as quoted by Interactive Investor. “In the event of a pension agreement where the DB scheme remains open – or where newer employees receive higher contributions, we believe there would be a negative reaction.”
The comments come ahead of Royal Mail’s full-year results a month from today, with Edridge expecting the FTSE 100 group’s earnings per share to have fallen from 32.2p to 21.1p in the year to March 2016.
RBC Capital meanwhile remains bearish on Royal Mail, reiterating its ‘underperform’ rating on the company last week with a price target of 445p. Investec, however, continues to see the postal services group as a ‘buy’, valuing the stock at 580p.
As of 10:24 BST, Tuesday, 19 April, Royal Mail share price is 490.25p.