Citi downgrades Royal Mail to 'sell' as outlook remains 'challenging'
Citi downgraded Royal Mail to 'sell' from 'neutral' on Friday, slashing the price target to 300p from 485p as it said the outlook remains challenging even after the recent reset.
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Citi said that while the recent profit warning prompted a share price drop of around 25%, this has only served to highlight ongoing risks the company faces in the near term. In addition, it said that despite the "significant reset", the shares are still more expensive than some European postal peers.
"As such we think the near-term risks for Royal Mail outweigh the opportunities and downgrade our rating," it said.
Citi also argued that the risk of an acceleration in the letter mail decline remains. It noted that while the impact of GDPR had been well flagged, management has lowered the FY19 letter mail decline expectations to 7%.
"While the company remains confident that the trend decline range if still 4-6% over the medium term, we think it prudent to move to the lower end of the range, -6% from -5%, owing to the uncertain nature of the impact of this new regulation and the ongoing risk of accelerating declines given the UK remains a comparatively heavy user of letter mail currently."
Citi said the scale of required cost efficiencies risks a further profit downgrade from Royal Mail. Although management reset investors' expectations for cost savings in FY19, "it has an uphill battle to claw back that shortfall over the next 18 months on top of the necessary FY20 cost efficiencies," the bank said.
As a result, it sees significant risks that the target could be missed, which would lead to another profit warning in the next year.
At 0855 BST, the shares were down 1.5% to 348.91p.