Royal Mail PLC (LON:RMG) shares remain undervalued, analysts reckon, with parcel volumes declining but still well ahead of where they were two years ago and the effects of the ‘pingdemic’ likely to boost summer demand.
Results for the past quarter showed volumes declining more than expected as the company laps the initial spike in online deliveries seen last year when the coronavirus hit the west and first lockdowns began.
However, UK volumes fell only 7.4%, which analysts at Peel Hunt noted were still 35% higher than two years ago.
The 40% decline in international volumes was attributed to an effect of Brexit and is likely to “rebase lower before a return to some growth” in the fourth quarter, the broker added.
On the plus side, average unit revenue was higher than expected, leading Peel Hunt to
At UBS, the most noteworthy item was that Royal Mail is on track to achieve the GBP110mln of cost savings with its main union, the CWU.
The GBP200mln cost reduction compared to last year “does not seem to be impacted by the recent weeks increase in absenteeism caused by an increase in no of COVID-19 cases”.
Noting that management did not offer guidance for Royal Mail, though GLS guidance was reiterated, the UBS analysts said they believe the consensus expectations on UK parcel volumes “have to come down” from the previously predicted 3% decline for the year, but equally “we see upside to parcel price/mix and letter volume expectations”.
The summer months offer easier comparatives from last year and “together with increasing cases in the UK and likely increased number of people isolating should be supportive for parcel volumes we believe – so we expect the peak decline in parcels was in May/June, with a deceleration going forward”.
UBS reiterated its ‘buy’ rating on the shares with its price target of 590p based on a sum-of-the-parts valuation based on a discounted cash flow valuation for Royal Mail and the GLS overseas parcels arm.
The Swiss bank forecasts GBP793mln adjusted earnings (EBIT) for the full year, which is lower than the consensus GBP809mln.