Royal Mail offers unfavourable risk/reward, says RBC
After Royal Mail shares were hit by accusations of breaching competition law by regulator Ofcom, broker RBC Capital Markets held onto its 'underperform' rating and target price of 475p.
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Ofcom's provisional view was that RMG has "breached competition law by engaging in conduct that amounted to unlawful discrimination" against postal operators competing in letter delivery.
This complaint, which was originally issued by rival TNT Post UK, trading as Whistl, seemed to relate to RMG's now-withdrawn attempt to introduce differential access pricing, the Canadian bank said.
RBC said it thought the differential pricing "was meant to reflect the higher cost to service and lower drop density of rural and low address density areas - where Whistl relied on RMG to deliver".
"In our view, Whistl cherry-picked dense high-drop-density urban areas."
But RBC said it was unclear whether the Ofcom issue is on the differential per se - as its research suggested a justified differentiation might be allowed - or the rate it was set at, or the way the rate was set.
Analysts pointed out that comments over many years suggests costs are differential, "but RMG will need to respond to justify how it reached its pricing offer in letter mail".
Whistl's parent, Post NL, with its own parcel business should be fully aware of this and indeed RBC commented that it felt TNT's 'cherry picking' of only urban areas for direct delivery implied this too. Whistl has has since abandoned this service.
"We think key here will be how RMG went about setting its prices and the thresholds/criteria it planned to use for each banding," the bank said.
RBC's view is that the Ofcom response continued to serve to show the elevated regulatory risk versus its peers that RMG faces versus European peers which enjoy higher dividend yields and often lower regulatory risk.
Continental peers also have less of their outlook riding on the parcel outlook.
Monday's TNT comments about parcel price pressure in France are also "not helpful" for the outlook of RMG's Europe-focused GLS parcel division.
"So for now, we see an unfavourable risk/reward outlook in RMG shares at present levels."