Sell Royal Mail, Urges Bank That Led Deal

One of the investment banks that led the £3.3bn privatisation of Royal Mail (LSE: RMG.L - news) told clients to sell the postal operator's shares on Wednesday, arguing that the company was now over-valued.

Sky News has obtained a research note issued by UBS (Xetra: UB0BL6 - news) , one of the lead bookrunners on last month's deal, in which analysts set a share price target for Royal Mail of 450p, roughly 20% below the level at which the shares closed yesterday, but more than one-third higher than the 330p at which ministers agreed to privatise it.

In the note published on Wednesday morning, the end of a mandatory 'blackout period' for analysts connected to the flotation, UBS said the market was excessively optimistic about Royal Mail's prospects.

"We believe management has executed well on improving productivity, with the UK margin rising to 4.3% in 2012-13 from -1.6% in 2009-10. We expect further improvements, due to productivity and revenue growth.

"However, with Royal Mail's share price up 69% since the IPO (versus 7-32% for peers), we believe the market is over-estimating margin upside. In particular, we believe it will be difficult to accelerate its transformation, given the limitations of the labour agreement.

"To get to the upper end of the 5-10% regulated range (assumed by the market; current 3%) would require acceleration of staff reductions, additional automation and no adverse events."

UBS said the stock market faced disappointment over the pace of automation in Royal Mail's parcels business.

"(Royal Mail's) future growth will be highly dependent on which parcel size grows. We also believe there is a growing disconnect between parcel and internet retail growth, with the rise of 'click and collect' and other such hybrid models reducing the need for parcels," it said.

The UBS research is likely to fuel the debate about the Government's valuation of Royal Mail ahead of a key session on Wednesday morning convened by the Business, Innovation and Skills Select Committee.

Investment bankers from UBS and Goldman Sachs (NYSE: GS-PB - news) will appear alongside representatives of Citi, Deutsche Bank (LSE: 0H7D.L - news) and JP Morgan (Other OTC: JPYYL - news) , each of whom argued for far higher valuations of Royal Mail when pitching to the Government to win the privatisation work earlier this year.

The latter three banks have been summoned following Sky News' disclosure of their presentations to ministers .

Three of the other banks which worked on the sell-off also published less bearish research notes on Wednesday.

Bank of America Merrill Lynch and Royal Bank of Canada (Toronto: RY-PC.TO - news) both put a 580p price target on Royal Mail shares, while Barclays (LSE: BARC.L - news) suggested the company was worth 466p.