UBS tells investors to exit overvalued Royal Mail amid UK government grilling

November 20
7:20 AM 2013

UBS, one of the many banks that helped facilitate the initial public offering of Royal Mail, was now dispensing advice to its investors to dispose their shares in the universal postal service. The advice came on the same day that UBS' advisers was due to make an appearance before UK's Members of the Parliament (MPs).

The increase of shares of Royal Mail to 60 pence apiece drew reaction from critics who said that the postal service's share price was undervalued.

UBS' analysts recommended in a note to investors that Royal Mail shares should be sold due to the reason that the shares were at a high valuation and was now perfectly priced.

"We believe management has executed well on improving productivity, with the UK margin rising to 4.3pc in 2012-13 from -1.6pc in 2009-10. We expect further improvements, due to productivity and revenue growth. However, with Royal Mail's share price up 69pc since the IPO (versus 7pc to 32pc for peers), we believe the market is over-estimating margin upside. In particular, we believe it will be difficult to accelerate its transformation, given the limitations of the labor agreement. To get to the upper end of the 5-10pc regulated range (assumed by the market; current 3pc) would require acceleration of staff reductions, additional automation and no adverse events," the note to investors read.

The MPs who composed the select committee in Business, Innovation and Skills would be quizzing representatives of selected banks who had played a part in the Royal Mail IPO today. The banks who had taken part in the flotation were Citi, Goldman Sachs, Deutsche Bank, Panmure Gordon and JP Morgan, aside from UBS. The other bank who had worked with UBS specifically on the IPO was Goldman Sachs.

According to UK's Te Telegraph in its report, banks like UBS normally run its research units independent of their investment banking divisions. UBS' note to investors today suggested that the bank's analysts believed the Royal Mail shares had advanced too far from itself since it launched its IPO last October 11.

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