Shares of Royal Mail PLC (LSE:RMG) were downgraded by UBS as the deterioration in the UK economy is expected to hit parcel volumes and less is expected from management’s cost-cutting plans.
While previously expecting UK parcel volumes to remain stable, bank analysts now expect them to fall by 5%.
This is based on an analysis of Office for National Statistics data on historical retail sales and online penetration, leading them to take a more conservative view.
Online sales in the UK are now expected to return around a third of the growth seen during COVID (Figure 1-3).
“Some of this market decline will be partially offset by Royal Mail’s growth initiatives,” the analysts said.
But with its main union, the Communications Workers Union, recently announcing its intention to vote for a strike, only 1% tailwinds in volume are now expected, compared to 2-3% previously.
Last March, the union threatened with strike as he accused the group of planning to lay off staff and rehire them with lower wages – a practice known as “fire and rehire”, as well as moving the goalposts during negotiations over proposed reforms, with the strike vote taking place this month.
If the CWU calls a strike, evidence from past strikes shows that the main risk is that customers walk away, with a likelihood of additional costs associated with larger temporary works to clear backlogs.
“All of this is partially offset by savings in personnel costs, as employees are not paid during strike days.”
A one to two day strike is expected to have a financial impact on underlying profit (EBIT) of £50m to £100m.
Currently, UBS’s forecast assumes that around £100-125m of the £350m cost reduction targets relate to the union relationship and “there is a risk that they will not not fully materialize this year”.
The rating was downgraded to “neutral”, with the share price target reduced to 280p from 420p and the previous close of 273.4p.