Spanish election results add to concerns over Greece’s eurozone futureLeading shares have started the shortened trading week in a downbeat fashion, partly on the continuing crisis in Greece, but Royal Mail is bucking the trend after a broker upgrade.The recommendation for Royal Mail from Cantor Fitzgerald is hardly glowing, but the broker has moved from sell to hold, and this has been enough to push the company’s shares 11.5p higher to 515p, the biggest rising in the FTSE 100 and a near 12 month high.Royal Mail reported solid full year earnings last week and delivered a healthy uplift in operating margin. But the UK parcels market continues to be over-supplied and the decline in letter use is persistent. Therefore, revenue growth is forecast to be muted and modest profit improvement will mainly be driven by restructuring. Royal Mail is trading on a 30% PE discount to the broad sector but this looks justified at the moment given our forecast for low growth. Our target price is lifted to 500p from 440p assuming lower capital expenditure and cash one-offs...W now assume capex and cash restructuring charges will be £70m lower each year and inflows from disposals will be £30m higher. This uncertainty in Spain is one of the main reasons why EU leaders are playing hardball with Greece, as any concessions granted to the Greeks are likely to play badly elsewhere in Europe where hard decisions have been made. The possibility of a Greek default early next month appears to be moving closer as politicians in Athens raised the possibility that the paying of pensions and salaries over the next few weeks would take precedence over payments to creditors, with the 5 June scheduled payment to the IMF the first test. Continue reading...
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