Royal Mail is leading the FTSE 100 fallers on concerns about the future outlook for its business.
Although the shares are still well above the 330p at which the company controversially floated, they have slipped 4.1p to 431.5p, well down on their 618p peak. Bad news for the postal workers who have not yet been able to sell their shares, but better news for Vince Cable in his attempts to argue the company was not sold off cheaply at the float.
The latest dip has come as analysts at Jefferies became the latest to issue a downbeat note on the business. They cut their price target from 420p to 400p and repeated their underperform rating. They said:
Royal Mail's first quarter interim management statement [at the end of July] reflected a 1% decrease in UK parcel revenues for the three months to the end of June, on the back of stronger than expected competition in the parcel market in the UK. With a high fixed cost base, we think the impact on profitability is likely to be substantial, but will not be disclosed before the release of interim results on 19 November. We have lowered our estimates by 6-8% on the back of relatively more sluggish parcel revenue growth assumptions.
It has a number of initiatives in place to re-gain market share, such as longer opening hours of the network on Saturdays and Sundays, which will start contributing in the second half of the year. The impact of lower than expected parcel revenues on profitability is expected to be offset by further cost savings and a good performance in letter post, with an expected volume decline at the better end of the medium-term 4%-6% expected range of decline.
We have lowered our parcel revenue growth assumption from 5% to 0% for 2014 and to 2% per annum beyond 2014, on the back of volume growth of 2% and a neutral price & mix effect. We... are now projecting operating profit before transformation costs to decrease by 13% to £584m for 2014, implying a 50 basis points lower underlying operating margin at 6.2% before transformation costs. We have lowered our earnings per share estimates by 6% for 2014 to £0.30, by 7% for 2015 to £0.28 and by 8% for 2016 to £0.27 per share.
Royal Mail shares are still trading 34% above their introduction price, while fundamentals have substantially deteriorated.
