Royal Mail share price tumbles as Credit Suisse turns bearish on group

Shares in Royal Mail Group (LON:RMG) have fallen deep into the red in today’s session, as Credit Suisse turned bearish on the privatised postal operator. WebFG News reports that the analysts have pointed to worsening letter revenue trends, as well as labour costs.

As of 13:10 BST, Royal Mail’s share price had lost 4.88 percent to 370.70, underperforming the mid-cap FTSE 250 index which currently stands 0.03 percent lower at 20,206.70 points. The group’s shares have lost nearly a quarter of their value over the past year, and are down by just under a fifth in the year-to-date, resulting in the group’s demotion from the FTSE 100 at the blue-chip index’s most recent quarterly reshuffle.

Weakening letter revenue trends

Credit Suisse trimmed its rating on Royal Mail from ‘neutral’ to ‘underperform’ today and lowered its price target on the stock from 492p to 325p, forecasting that worsening letter revenue trends and a costly labour deal will render 2018 earnings unsustainable. The bank also does not expect free cash flow to cover dividends from FY21.

“Our data suggest that cost savings from government digitisation initiatives are still to materialise, and history shows that the Danish and Dutch governments’ digitisation initiatives coincided with accelerating mail volume declines,” Credit Suisse explained, as quoted by WebFG News, adding that internet use was rising fast among adults over 65, reducing the need for letters.

Labour costs

The broker further argues that labour negotiations will add pressure to the stock, with its analysis of labour negotiations around privatisation and changes to pension entitlements in 2013 supporting the analysts’ “forecast of a three-year pay deal with annual rises of 3%, versus implied consensus at 2-2.5%”.

“This cuts EBIT by £40-50m per annum in FY19E and FY20E,” Credit Suisse concluded. The comments come as the privatised postal operator continues to struggle to reach an agreement with a trade union over its plans to replace its defined benefit pension scheme with a cheaper alternative.

Royal Mail is scheduled to update investors on its half-year performance on November 16. 

As of 13:40 GMT, Tuesday, 31 October, Royal Mail share price is 371.20p.