Royal Mail’s union deal is ‘expensive’ but Berenberg upgrades on medium-term momentum

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Royal Mail PLC (LON:RMG) still faces risks and its new pay deal with unions is “expensive” but broker Berenberg has removed its ‘sell’ recommendation on the letters and parcel group’s shares.


In the week before Christmas Royal Mail said it has agreed a two-year pay deal with its main union, the Communication Workers Union (CWU), allowing it to upgrade its postal services technology with new automated ‘parcel hubs’, providing more flexibility on shifts across its operations and the introduction of dedicated van delivery duties for parcels and the possibility of more frequent midweek deliveries.


In return, CWU members will receive a 2.7% pay increase backdated to last April and a further pay increase of 1% with effect from April 2021, together with a one-hour reduction in the working week.


While this deal will add an estimated GBP260m-330mln of additional wage costs over the 2021 and 2022 financial years, Berenberg analyst William Fitzalan Howard said in a note on Tuesday, “the outcome could have been much worse”.


He added: “While the company’s track record of operational improvements is patchy, we acknowledge that this is a step in the right direction, and crucially one achieved without severe union hostility or expense (for the moment).”


The coronavirus pandemic has been relatively positive for Royal Mail as, despite a severe hit to letter volumes, it has enjoyed the effects of a surge in e-commerce at both its UK division and overseas business, GLS.


“With relations with the UK employee unions derisked for the moment and online shopping likely to continue apace at least until the vaccine is more widely rolled out, we envisage limited further downside risks in the near term,” the analyst said.


As a result, Berenberg’s recommendation was upgraded to ‘hold’ and the share price target was sharply hiked to 280p from 137p.


Adding a note of caution, the analyst said he remained sceptical about the UK business’s ability to achieve substantial productivity improvements without sweeping headcount reductions, “which would be extremely difficult to accomplish”, and letter volume declines look “likely to remain remorseless for some time” – a combination of headwinds he feels is likely to build over time, though will remain “overshadowed by near-term momentum for the next few months”.

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