Royal Mail Share Price: Smaller Margins, Higher Costs Fuel Decline

Summary:

The Royal Mail share price gets a significant downgrade from Peel Hunt, a UK investment brokerage, citing smaller margins and increased costs

The Royal Mail share price could not sustain the bullish momentum with which it began the week and currently finds itself 1.82% in the red. This follows Tuesday’s 5.51% drop and stems from investor reaction to the latest outlook reports from an investment brokerage.

A UK-based prime broker Peel Hunt has cut its Royal Mail share price target from 500p to 307p and has issued a “sell” rating after weaker forecasts, and falling revenues have plagued the UK postal company.

The broker noted that while the postal company’s results in the last fiscal year were ok, it was facing increasingly lower margins in its General Logistics and UK businesses. Peel Hunt, a prime brokerage with a speciality in analyzing small and mid-cap stocks, has advised investors to dump the stock following the major price recalibration.

Rising costs of deliveries and reduced patronage of its parcel services by as much as 10.2% are headwinds besetting its UK arm. As a result, Royal Mail has been forced to raise the prices of its priority mail services and is now set to implement a wholesale increase in the price of letters and parcels while putting in place a £350million cost-saving plan.

Peel Hunt also points out that rising inflation could force consumers away from the posts as they prioritize their spending. The postal company is also facing the prospect of losing a lucrative COVID-19 test kit delivery contract which used to be paid by the UK government in full.

The violation of the 310.8 support is in progress. The bears must degrade this support to clear the path toward 295.7 (23 November 2020 low). 281.7 and 268.2 are additional price support levels available once 295.7 is broken. 250.3 (10 November 2020 low) rounds off the list of potential pivots.

Conversely, an unsuccessful attempt at degrading the 310.8 support could bring 317.1 (6 April and 9 May low) into the picture. 333.6 is the next resistance in line, formed by the 8 March low/17 May high. This barrier must give way for the 349.4 resistance target to become available. This point also breaks the channel’s return line and makes new upside targets available at 363.3 (28 March low) and 377.0 (21 March high).