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FTSE falls on new Chinese woes but Royal Mail jumps once more

Discussion in 'Market News' started by Lily, Jan 6, 2016.

  1. Lily

    Lily Forum Member

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    Investors remain nervous after disappointing Chinese services data

    For the second day running Royal Mail is in demand when the overall market is looking edgy.

    The company’s shares have climbed 6.9p or 1.5% to 444.1p as - a day after a positive note from Cantor Fitzgerald - analysts at Barclays raised their recommendation from equal weight to overweight. They said Royal Mail was in a period of transformation and should deliver better growth than its rivals over the next three to five years, mainly due to cost saving. They said:

    We see three key issues for 2016. The current wage deal expires in March and we expect a new deal to be negotiated during the first quarter of the year. Management is moving towards the closure of the defined benefit pension scheme, which will become unaffordable once the current contribution deal with the trustees expires in 2018; we would expect this to be resolved in the second half of the year and require some asset injection to close. The regulatory review, which is focusing on the access regime, has no fixed timetable within 2016, but the regulator expects next steps to be announced in the first quarter.

    Despite a late recovery in Chinese share prices, markets continue to worry about the potential weakness of the Chinese economy in 2016. This has seen European equities fall once again as the New Year remains challenging for investors, against a backdrop of heightened geo-political tensions, global growth concerns and continued pressure on commodity prices.

    Following Game’s trading update on 23 December we now downgrade to hold and cut our target price from 290p to 120p. In our note on 23 December we cut our earnings per share forecasts by 60% for 2016, 42% for 2017 and 30% for 2018.

    Today we cut dividend forecasts by 19% this year to 12p per share, implying 0.6 times earnings cover and forecast that the company will hold the dividend at this level until cover begins to build. We view this pay out as sustainable and while uncovered this year, forecast year end net cash to be broadly £50m for the next three years.

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