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Buy, sell, or hold? Analysts cautious ahead of Royal Mail results

Nick Paler
Written By:
Nick Paler
Posted:
Updated:
25/11/2013

Royal Mail shareholders have been richly rewarded so far, with gains of more than 60% on their investment. But is the game up for now, or should investors hang on ahead of the group’s results?

While some shareholders (in particular consumers) flipped their shares after the company listed – having seen the sale price of 330p jump to a peak of 595p just days after it started trading on the stock exchange – others have held on to some or all of their stock in the belief the company’s transformation could reap rewards over the long term.

This week’s interim numbers will undoubtedly help make up investors’ minds, as details of how the business plan is playing out are revealed.

But should investors get ahead of the curve and act now, before the numbers are released?

Short-termism is something investors should try to avoid, especially if they believe in a company’s goals and strategy, but after such a stellar rise, analysts are cautious, in the main putting forward either ‘sell’ or ‘hold’ ratings, with price targets well below the current price of 532p.

Even the most positive broker note seen by Investment Week has price targets with upside capped at around 2% from current levels.

Sell

Analyst Dominic Edridge at UBS initiated coverage last Wednesday with a ‘sell’ rating and a price target of just 450p on the stock, a discount of 15% from current levels.

Such a low price target may raise a few eyebrows, especially as UBS was one of the brokers punting Royal Mail. However, Edridge argues the increasingly competitive landscape, coupled with the fact the ‘easy wins’ in the parcels market have been had, could put pressure on a business whose shares have already soared.

Merrill Lynch and RBC agree the stock has had its day in the sun for now, and although they are not sellers, they do not see significant upside in the near term.

Barclays’ coverage is labelled neutral, with an ‘equal weight’ rating on the stock, but its price target of 466p suggests its analysts also think the share price has got well ahead of itself.

Hold

Investec’s support services and transport specialist, John Lawson, has opened the bank’s coverage by rating Royal Mail as a ‘hold’, with a price target of 544p.

Lawson said despite expecting profits to “grow strongly in the medium term” – its current forecasts are for profit before tax to jump from £397m in 2013 to £476m in 2014 – investors need to be cautious after the huge gains seen when it listed.

“Unless next week’s update contains some dramatic new news, the stock may have overrun in the near term,” he said.

Buy

Shore Capital sees much more upside from here, with analyst Robin Speakman rating the stock as a “buy”.

Speakman will be looking for revenues around £4.47bn for the first half (which does not include the vital Christmas season) as well as profit before tax of £238m before restructuring costs.

Speakman is playing the long-term value approach, and said shares look good value up to 580p.

“It is a mature business that is not cyclical, and on standard cashflow assumptions it is easy to reach the current share price,” he said.

“The resolution to the potential strike action could remove uncertainty, and that is a key thing to look out for this week.”