UBS tells investors to sell Royal Mail shares

Swiss investment bank UBS, among a quartet of investment banks that helped float Royal Mail, yesterday told investors to sell the shares.

According to the Swiss investment bank, ''market expectations were too high'' for the company, whose shares were trading 8.5 p lower at 541.5p. Analysts had quoted the target price of the stock at 450p, citing uncertainty over how quickly Royal Mail could drive efficiencies from its parcels business to increase margins and cut staffing costs.

''With Royal Mail's shares up 69 per cent since the IPO, versus 7 per cent to 32 per cent for peers, the market is overestimating margin upside,'' it said.

''With mail volumes falling 6-8 per cent, the major opportunity and risk is with the parcels business.

''We believe parcel automation could have a significant impact, but it is likely to take time to implement, due to the fact that current staffing levels mean it would be difficult to benefit from the savings quickly. This may disappoint the market,'' the bank added.

Analysts from the other banks in the float, Barclays, Bank of America Merrill Lynch and RBC, also issued notes yesterday with none prepared to give a buy rating. They were neutral on the stock.

Meanwhile, Goldman Sachs and UBS bankers said the government could not have sold the Royal Mail postal service at its current higher price, rejecting accusations that taxpayers had been shortchanged in one of the biggest privatisations in years.

The two banks, which led Royal Mail's London stock market listing, were summoned before a parliamentary committee yesterday to explain why the 500-year old firm's price had been so heavily discounted vis-a-vis  its current market value.

Royal Mail's shares had shot by 80 per cent since the UK government sold a 60 per cent stake in October for 330 pence per share, sparking criticism from unions and opposition lawmakers that the Royal Mail had been undervalued by the banks.

The sell-off is in the spotlight as it was the most significant since the sale by John Major's Conservative party of the railways in the 1990s, and comes as the government was aiming to offload shares in Lloyds Banking Group and rival RBS.

Adrian Bailey, chairman of the Business Innovation and Skills committee and a member of the opposition Labour party, in a criticism of the Royal Mail sale price, said it was possible that the government had lost over £1 billion worth of revenue for taxpayers at a time of great austerity. He was speaking to Reuters after the hearing.