HSBC downgrades Royal Mail despite 'credible' plan

Analysts at HSBC downgraded Royal Mail to 'hold' and cut their price target on the firm by almost a third on Friday, noting that its 2020 earnings before interest and taxes were likely to be lower than last year as positive earnings momentum was "some way off".

HSBC said Royal Mail's five-year strategy revealed in late May was "a credible plan" but warned that it would likely take "time to deliver" management's long-awaited remedy for the progressive deterioration in the group's profit outlook.

However, after an extensive review and with a refreshed board, HSBC felt Royal Mail had finally been put in a position to respond.

"The plan to increase automation and re-orientate the business towards parcels is credible and necessary, but based on our forecasts the benefits are clearly back end loaded," said HSBC.

HSBC, which lowered its price target on the firm to 216p from its previous 300p standing, also expected earnings per share to be lower in 2019 than they had been a year earlier and saw "little likelihood of an increase" in Royal Mail's dividend of 15p "for some years".

Clearly, the British bank was giving Royal Mail "no benefit of the doubt" just yet, its analysts noted that if management achieved their revenue and margin targets, then by 2024 the group's operating profit after transformation costs would be in the region of £620m.

"In other words, it will take six years for profits to exceed where they were in 2018," said the analysts.

"On this basis, we downgrade our rating to 'hold' from 'buy' as we see few incentives for marginal buyers to become involved at present."