(Sharecast News) – Deutsche Bank upgraded Royal Mail to ‘buy’ from ‘hold’ on Wednesday, highlighting a “complete change of outlook”, as it hiked the price target to 550p from 320p.
The bank noted that its ‘sell’ case on the stock between 1 December 2017 and 5 May 2020 was based on the fact it thought revenues, costs and cash flow would decline to a point that the dividend would have to be cut.
In addition, DB said the company’s ‘Journey 2024’ targets, which included an implied operating profit target of about £600m in FY’24, were far too bullish.
It lifted its stance to ‘hold’ from ‘sell’ in May not because it could see the huge structural positives that Covid-19 would bring, but mainly due to buying pressure from Czech billionaire Daniel Kretinsky – Royal Mail’s largest shareholder through his investment vehicle; a material short base; and the potential for the group to be broken up.
“We now think that RMG’s earnings have been materially rebased upwards as there has been an acceleration of the structural shift towards ecommerce and parcels and that the group can now grow its earnings in the medium term,” Deutsche Bank said.
“Although RMG is still in transformation and modernisation mode, the company is in a much better position to negotiate with the Communication Workers Union (wage agreement in December 2020) and to generate sufficient free cash flow to restart modest amounts of dividend payment.”
At 1455 GMT, the shares were up 3% at 401.90p.
