Royal Mail share price forecast: is further weakness likely?
The Royal Mail plc (RMG) share price has seen a phenomenal recovery of nearly 65% over the past 12 months. However, the stock is now more than 30% off its year-to-date high reached in June 2021.
Why is the Royal Mail share price falling and where to next?
Read on to find out why investors might be selling and what analysts’ latest stock projections look like.
RMG share price analysis: the sell-off gathers pace as headwinds overshadow higher parcel deliveries
The Royal Mail share price history shows us that the stock hit an all-time low of £1.18 in mid-March 2020 as Covid-19 spread across the UK and disrupted businesses. The price then rebounded off this level, clawing higher during the remainder of the year. The company was able to take advantage of lockdown restrictions which saw e-commerce surge, boosting the need for parcels to be delivered. The stock started 2021 at £3.40 a share, 188% up from it's 2020 low.
The price continued to rise during the first half of 2021, reaching a three-year high of £6.13 on 7 June as revenue earned from parcels outstripped that from declining letter volumes. However, it was unable to maintain that momentum when the pandemic eased and life started to return to normal. The RMG share price started trending lower in early July, losing more than 30% from its June highs.
The stock ended the trading session on 5 October at £4.09.
What did the latest Royal Mail trading update tell us?
On 23 September, the group released a trading update. For the financial year from 1 April to the end of August, it reported an 8.2% increase in revenue compared with the year before. The figure becomes even more impressive when compared with 2019 pre-pandemic levels, revealing that revenue is up 17.7% on a two-year comparison.
Royal Mail also gave an upbeat outlook for the rest of the year – adjusted operating profit for the first six months of the year is expected to be at £395m–£400m. It could be higher for the second half of the year. This would be a significant improvement from £702m recorded last year.
However, as the company pointed out, there is significant short-term uncertainty. Delving deeper into the numbers, the July and August post-lockdown period showed that revenue growth slowed, with total parcel deliveries by Royal Mail declining year-on-year by 4.6%. Royal Mail put this down to seasonality, considering that demand will remain above pre-pandemic levels long-term as the shift to online shopping becomes more entrenched.
Analyst Gerald Khoo from Liberum highlighted this point in a note to clients. He considered that latest trading update to be broadly supportive of the current consensus, with parcel trends stabilising at structurally higher levels.
However, Royal Mail is facing other headwinds, such as the ongoing labour shortage in both the UK and Europe and rising energy costs, which could also limit earnings growth in the near term.
Cost pressures are expected to continue rising in the UK as gas prices surge. The energy crisis is lifting gas prices sharply higher and the trend shows few signs of stopping heading into the winter months. As a result, both energy and transportation costs are soaring for businesses across the UK.
Labour costs are also expected to rise as the company starts to hire temporary workers to cover the festive season. Royal Mail is also experiencing hiring problems after the pandemic roiled the labour market, which was exasperated by Brexit, as many foreign nationals returned home.
The technical picture: Royal Mail’s death cross
The Royal Mail share price has been trending higher since August last year, running into resistance at £6.13 on 7 June. Since then, it‘s been forming a series of lower highs and lower lows, breaking below its 200- and 50-day simple moving averages (SMAs) and hitting an eight-month low of £4.07.
The 50-day SMA is on the verge of crossing below the 200-day SMA in a death cross formation, a strong bearish signal.
The Relative Strength Index (RSI) is deeply in the oversold territory, suggesting that a period of consolidation or a move higher could be on the cards.
Support can be seen at £3.84, the late January low, ahead of £3.36, the 2021 low.
On the upside, any meaningful recovery would need to retake £4.70, a horizontal support, for much of September, ahead of £4.88, the 50- and 200-day SMA, and £5.03, the September high.
So, are Royal Mail shares a buy or sell? Where could the stock price be heading over the coming months?
Analysts’ take: what’s next for the RMG share price?
UBS raised concerns over rising operating expenditure costs, which caused it to downgrade the stock rating from buy to sell and slash its price target. Analysts at the bank said: "We expect increasing opex costs are coming at a time when the pricing power within the industry is likely to decline as more parcel sortation capacity is added in 2022.”
"We expect peak uncertainty around UK parcel volumes in Q4; and wage inflation ahead of the negotiations with CWU," it added, noting that the current agreement ends in March.
"In this context, we believe the stock could underperform."
Analyst Laura Hoy from Hargreaves Lansdown highlights tough comparisons from last year but also sees a new norm for deliveries being established well above pre-pandemic levels. Hoy said: “Royal Mail was a major beneficiary of the shift to online shopping, which means now that we’re lapping lockdown results from last year it’s more difficult to post strong growth numbers.
“But price hikes mean the postal service managed to deliver revenue growth despite declining parcel volumes, and although last year’s online shopping boom was likely a temporary peak, it looks like the new normal for shipments will be significantly higher than pre-pandemic levels.”
In the meantime, AJ Bell investment director Russ Mould is more critical of Royal Mail and the company’s outlook. He commented: “Royal Mail seems unusually bullish, maintaining earnings guidance despite clear headwinds from cost pressures. That’s a dangerous stance to take as the stock market likes companies that under-promise and over-deliver, not the other way round.
“The surge in parcel volumes has given Royal Mail a reason to be more optimistic but it isn’t necessarily the final solution to its years of disappointing investors.”
Fiona Cincotta, a senior market analyst at City Index, believes that the share price has more downside to run before a potential move higher. She wrote in an email to Capital.com: “While parcel numbers remain higher than pre-pandemic, cost pressures are on the rise and unlikely to abate anytime soon. Fundamentally and technically, the near term outlook is bearish. Royal Mail could struggle to finish this year in positive territory.
“That said, the longer term prospects are still encouraging with e-commerce expected to continue growing, boosting delivery demand. The stock still has potential to grow over the coming year and the share price to recover towards £6.00.”
According to the Financial Times, 15 analysts have issued ratings on the stock over the past 12 months – with four buy ratings, six outperform, four hold and one underperform. The average one-year Royal Mail stock forecast is £6.37, which marks a 53% upside from the current price. The high and low price targets are set at £10.00 and £4.40, respectively.
According to algorithm-based prediction website Wallet Investor, the stock is expected to gradually rise over the coming years. Its RMG share price forecast suggests the price will rise to end 2021 at £5.03 before easing slightly to £4.99 by the end of September 2022. However, this still marks a gain from current levels.
Looking further ahead, the service’s Royal Mail share price prediction sees the stock once again advancing, ending 2023 at £5.38 and 2025 at £5.79.
When considering analyst commentary or predictions from algorithm-based forecasting services, it’s important to keep in mind that they can get their estimates wrong. You should always do your own research to form a view of the outlook for an asset and consider relevant market conditions.
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Are Royal Mail shares a good buy?
Having fallen more than 30% since June 2021, Royal Mail shares appear to be on a firmly bearish trajectory. While parcel volumes have benefitted from the rise in online shopping, rising energy and staffing costs are creating strong headwinds in the near term. This could mean that the share price sees further losses.
Whether RMG is a suitable buy for your portfolio depends on your personal investing goals and your financial circumstances. You should do your own research to determine whether the stock is a good fit for you and your risk tolerance. As with any investment, you should never invest more than you can afford to lose.
Will the Royal Mail share price go up?
According to the Financial Times, the average 12 month Royal Mail share forecast is £6.37. Algorithm-based website Wallet Investor expects Royal Mail share value to rise over the coming 12 months.
It’s important to remember that analysts and algorithm-based prediction websites can get their estimates wrong. Whether you believe those stock predictions is a decision only you can make. It’s vital to carry out your own research. Also, keep in mind that past performance is no indicator of future returns. And never invest money that you cannot afford to lose.
How to buy/sell Royal Mail shares?
You can buy Royal Mail shares through a stockbroker platform, or trade them with contracts for difference (CFDs).
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