Shares in Royal Mail fell on Tuesday after the stock was downgraded by Credit Suisse.
The bank changed its recommendation from ‘underperform’ to neutral’ and cut the target price from 492p to 325p.
Credit Suisse said it expects worsening letter revenue trends and higher than expected staff costs to make projected 2018 earnings unsustainable. It also does not expect free cash flow to cover dividends from 2021.
Analysts now expect Royal Mail to generate profits of £515m in 2018 (5% down on forecasts), £444m in 2019 (18% down) and £382m in 2020 (31% down).
Credit Suisse said there were two factors behind its view that letter revenue will weaken – action by RBS, Santander and the UK government to cut mail volumes, and the rise in internet traffic.
“Our data suggest that cost savings from government digitisation initiatives are still to materialise, and history shows the Danish and Dutch governments' digitisation initiatives coincided with accelerating mail volume declines,” it said.
It also pointed out that internet use is rising fast among adults over 65, reducing the need for letters.
Labour negotiations will also add pressure to the stock, with probable wage inflation of 3%.
“Our analysis of labour negotiations around privatisation and changes to pension entitlements in 2013 supports our forecast of a three-year pay deal with annual rises of 3%, versus implied consensus at 2-2.5%,” the report said. “This cuts EBIT by £40-50m per annum in FY19E and FY20E.”