Royal Mail dividend at risk, analysts warn
Royal Mail shares continued to fall on Tuesday, a day after releasing a late-afternoon profit warning, as analysts downgraded their forecasts and ratings on the letters and parcels group.
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The FTSE 100 group slashed its full year profit guidance on the back of lower letter volumes, a dip in parcel profits and slower progress with cost cutting since resolving industrial action in March. First-half productivity improved by just 0.1%, leaving the previous full year target of nearly 3% well out of reach and with resulting consequences for 'cost avoidance' plans.
JPMorgan Cazenove on Tuesday downgraded its rating to 'underweight' from 'neutral' on the "worrying combination of accelerating letter volume declines and a vastly reduced rate of cost efficiencies".
Royal Mail's management "has not provided much evidence for why either of these should improve over time", was Caz's view.
Analysts at the bank said the dividend cover did not look sustainable, with its medium-term forecasts suggesting an uncovered dividend but directors of the company still reiterating their intention to pay an increased dividend for the full year. The price target was cut to 341p price target from 537p.
Morgan Stanley said it believed margins and cash flows could come under further significant pressure due to letter mail trends and cost base mitigation challenges, even if parcels revenue momentum is positive.
The bank noted that RMG has an attractive portfolio of London property, which management hope to monetise, though there is uncertainty around this.
Analysts at Liberum slashed their target price to 250p from 415p on a profit warning that was "shocking in its scale and timing".
As the £130m reduction in the current year's cost avoidance target drops straight to the bottom line, leaving the weakness in letters volumes and margins at the GLS overseas parcels arm "almost peripheral by comparison".
The broker cut its March 2019 EPS forecast 30% and subsequent years by 38%.
"Management intends to continue to grow the dividend, but cover by earnings and cash flow is weak."
Noting that weak business confidence and the impact of GDPR were blamed for the hit to mail volumes, Credit Suisse forecast a 7% decline in mail volumes and 5.3% revenue declines for the year to end-March, expecting a rate of mail revenue decline of circa 4% in the long term versus the prior 3% trend.
Although the company took £600m of cost out of the business in its preceding three financial years, Credit Suisse had questions for management, firstly how it can continue to take £150-200m of cost out of the UK business, with accelerating parcel growth and faster letter volume decline, of which 90% is automated; second, was whether it can offset the 2020-year labour cost headwinds of at least circa 3.3% or around £165m?