Of all the stocks in the FTSE 100, Royal Mail PLC (LSE:RMG) is the one trading furthest below (in percentage terms) its consensus target price.
That could mean it is a stone bonker bargain or it could mean that the 15 brokers covering the stock have been a bit lazy in updating their forecasts since the company said towards the end of September that parcel volumes had slowed sharply since the easing of Covid-19 lockdown restrictions.
The median target price among the brokers covering the stock is 659p, versus last night’s close of 412p, suggesting the broking community sees 60% upside.
Of course, the brokers are not of one mind. Seven brokers rate the stock a ‘buy’; three rate it ‘outperform’; four sit on the fence and one rates it a ‘sell’.
Averaging those ratings out, giving a value of 1 for a ‘buy’, 2 for ‘outperform’ and so on, the consensus rating is ‘outperform’.
The dissident broker is UBS, which expects increasing cost pressures to come at a time when the pricing power within the courier industry is predicted to decline.
It slashed its price target to 440p from 590p at the end of September saying it expects “peak uncertainty” to build around UK parcel volumes in the all-important fourth quarter alongside wage inflation ahead of the negotiations with the company’s main union, the CWU, with the current agreement ending next March.
UBS analysts noted official data showing UK transport and logistics job vacancies at the end of September are running “meaningfully above” pre-COVID-19 and last year levels, with Royal Mail having to hike salaries 30% for temporary workers.
That’s fine and dandy, said Citibank yesterday, but all of that is baked into the price, which has fallen from 479p to 409p over the last two weeks.
Citi says it has modelled GBP332mln of cost inflation (or 5% for the year to March 2023), which should be offset by automation and ongoing cost-saving activities, resulting in flat personnel and non-personnel cost.
It reckons the share price weakness represents a buying opportunity.
