Royal Mail's valuation looks 'stretched', says Credit Suisse



LONDON (ShareCast) - The share price of postal and delivery service firm Royal Mail (Other OTC: ROYMF - news) was trading lower on Tuesday after Credit Suisse (NYSE: CS - news) initiated coverage of the stock with an 'underperform' rating.

The Swiss bank has set a target price of 530p, indicating 12% downside potential to current prices.

"And for multiples in line with peers and a mid-range financial performance, we see better opportunities elsewhere in the sector," analysts said in a research report.

Credit Suisse believes that the stock's valuation looks "stretched" given its 85% jump since the flotation in London in October 2013.

"We think intensifying competition in last-mile delivery could cap Royal Mail's margins at the lower end of its targeted range (5-10%). Challenging consensus expectations on margin progression leave little room for error."

The bank attributed these competitive headwinds to the ramp-up of TNT Post (Post NL in the UK) which could render its margin targets "overly ambitious".

"We estimate Royal Mail could lose circa £540m revenues (6% of group) in five years, which would fall largely to the bottom line."

The stock was down 0.7% at 589.94p by 10:03.