Royal Mail has dropped back ahead of its trading update, covering the crucial Christmas period, next week.
Its shares are down around 1% or 4.7p to 429.6p, not helped by a downbeat note from Credit Suisse. Analyst Hugo Turner has an underperform rating on the company with a target price of 380p. The business is likely to benefit from the demise of rival City Link, but Credit Suisse is still concerned about the outlook:
Christmas trading, a mixed bag: We think parcels pricing will be weaker but volumes should be marginally stronger than market expectations, so broadly a neutral net impact over Christmas.
Consensus operating profit has now adjusted down to company guidance for 2015 and we continue to model a miss to guidance (£566m operating profit) based on relatively conservative pricing assumptions. This would be taken negatively by the market, particularly given the relative resilience of Royal Mail over the Christmas trading period (6 weeks to today, Royal Mail flat versus FTSE100 at -3%, having peaked at 442p).
Why stay short into the New Year? i) Parcel sorting capacity coming on stream in 2015 should outstrip demand, impacting pricing as operators push volumes through their expanded networks to drive scale benefits, ii) traditional retailers are increasingly focused on Click & Collect which will become a more prominent theme, iii) [European delivery subsidiary] GLS is likely to face cost pressures in 2015 from minimum wage requirements introduced in Germany, iv) foreign exchange headwinds are persisting, and v) downstream competition in mail is seemingly here to stay following Ofcom’s update in December. We think restructuring should remain top of the agenda as the multi-level competitive threats require deeper and potentially more costly restructuring, representing a drain on cash.
