Royal Mail downgraded to ‘sell’ by UBS on rising cost pressures

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Royal Mail PLC (LSE:RMG) has been downgraded to ‘sell’ by UBS as analysts expect increasing cost pressures to come at a time when the pricing power within the industry is predicted to decline.


The Swiss bank cut its share price target to 440p from 590p, with the shares closing overnight at 479.2p.


UBS expects “peak uncertainty” to build around UK parcel volumes in the all-important fourth quarter alongside wage inflation ahead of the negotiations with the company’s main union, the CWU, with the current agreement ending next March.


“In this context we believe the stock could underperform.”


Illustrating the labour shortages and wage inflation pressures as we enter the peak season, the UBS analysts noted official data showing UK transport and logistics job vacancies at the end of September are running “meaningfully above” pre-COVID-19 and last year levels, with Royal Mail having to hike salaries 30% for temporary workers.


The national insurance incremental tax adds GBP50mln of costs in the 2022-23 period, they added, while higher electricity and gas prices could increase by GBP20-30mln in 22/23.


“Royal Mail employee feedback on the implementation of structural revisions also suggests potential downside risks to achieving the full GBP100m productivity benefits in FY21-22. In this environment we believe CWU has a high bargaining power into the current multi-year wage negotiations,” wrote analyst Cristian Nedelcu, noting that 1% UK wage inflation impacts underlying profits by around 5%.

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