Investors breathe a sign of relief as Ofcom says it won’t impose new price control on Royal Mail’s (RMG) wholesale or retail products, sending the shares up 1.1% to 526.5p. The communications regulator declares the postal delivery firm to be financially stable with safeguards that work for both the public and businesses.

Investec calls it a ‘near best-case scenario’ and believe the company’s valuation could increase as a result of an improved parcel market, property disposals and accelerated possible cost savings. That is dependent on the outcome of pay talks with trade union CWU with possible news coming in the next one or two weeks.

Davy Research maintains a ‘hold’ rating on the stock, albeit recognising Royal Mail’s improved finances and 5.6% EBIT (earnings before interest and taxes) margin on regulated business, as well as conservative price increases.

Despite the improvements, Ofcom says Royal Mail needs to further improve efficiency as this varies in different depots.

The regulator says untracked letters need to be protected from the risk of loss, theft or damage by introducing rules to clarify how postal operators look after them, or face fines.

In addition, Ofcom proposes tightening rules in the access market, which are rival operators that collect and sort mail before passing it on to Royal Mail for delivery.

Ofcom wants to stop shorter notice periods around contractual terms being imposed on access operators, and a response within six weeks when a wholesale customer requests a product similar to one already sold by Royal Mail.

There is concern about the mail distributor cross-subsidising its parcels business through its letters business, as it has a larger market share and network that can work against its rivals.

Investment bank Liberum is on the shares, recommending ‘sell’ with a 360p target price, saying Royal Mail is priced for growth ‘that is not going to be there’.


UPDATED 16.30: Royal Mail has issued a statement in response to the Ofcom announcement, saying:

'Royal Mail welcomes Ofcom's finding, as part of its Review of the Regulation of Royal Mail, that customer satisfaction with postal services and value for money is high.

'Ofcom also notes that, following price increases introduced in 2011-12 and 2012-13 in order to return to profitability, our price increases have been broadly in line with RPI.

'In relation to efficiency, Royal Mail has a stretching efficiency programme in place and is targeting to avoid around £500 million of annualised costs by 2017-18. Ofcom's review also demonstrates that there is strong competition in the access market.

'Royal Mail will actively participate in the consultation process, including providing a detailed, evidence-based submission to Ofcom.'

Issue Date: 25 May 2016