HSBC ups Royal Mail to 'buy' as valuation attractive again

HSBC upgraded Royal Mail to 'buy' from 'hold' on Tuesday, lifting the price target by 5% to 550p as it said the stock's valuation was attractive again.

It noted the share price performance has been fairly subdued lately following the strong rally that followed the landmark deal with unions on pay and pensions in December last year. The shares have underperformed the FT All Share index by 20% in the last three months as estimate momentum turned negative following the full year results.

In the wake of the recent share price selloff and despite its big estimate reduction, HSBC said it sees short-term value in the shares again compared to its revised target.

HSBC said the revamped IT system and innovative labour agreement should deliver further productivity gains and customer service improvements.

"It is difficult to overstate the importance of the now completed renewal of the group’s antiquated IT system, in our view. It has laid the foundations for meaningful improvements in reliability, as well as providing the infrastructure for enhanced customer services," it said.

In addition, the bank argued that the union deal is key to further progress.

"The unions have accepted the need for change and flexibility and are actively involved in a number of trial projects to identify more efficient ways of working. Granted that some of the productivity gains will be used to offset a progressive shortening of the working week, but we expect additional benefits beyond this."

Royal Mail shares closed up 0.9% at 470.50p.