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Broker tips: Greene King, Royal Mail

By Iain Gilbert

Date: Tuesday 20 Aug 2019

Broker tips: Greene King, Royal Mail

(Sharecast News) - Analysts at Canaccord Genuity raised their target price on British landlord Greene King on Tuesday, but lowered their recommendation for the firm's shares from 'buy' to 'hold' following the previous session's accepted offer from CK Noble.
Shares of Greene King surged on Monday after the pub group agreed to be bought by a subsidiary of CK Asset Holdings, the flagship of the CK Hutchison Group, for 850.0p a share in cash - the broker's new target price.

Following the announcement, the Canadian broker took a fresh look at its numbers on Greene King, pointing out that the offer was at "a substantial premium" to its previous 670.0p share price target.

But Canaccord Genuity wondered if there was still a possible counter-bidder to be flushed out, noting that it had long held the view that the major asset-intense pub companies were potential targets for major brewers wishing to enter the UK market, with the most obvious bidder being Molson Coors.

"If any brewer is interested in extending its position in the UK market, they need to hurry up," said Canaccord, which also pointed out that somewhat unsurprisingly, the share prices of other pubcos, Wetherspoon, Marston's and Mitchells & Butlers all reacted positively to the news.

Royal Mail shares were under the cosh on Tuesday as JPMorgan Cazenove said there is "potential for material near-term volatility and uncertainty" in the eventual outcome of the company's dispute with the Communications Workers Union (CWU).

"Since RMG's May 2019 FY results and strategy update we note a material and growing increase in industrial relations tension," JPM said in a note, with both parties currently in external mediation over Royal Mail's plans to expand its network to improve parcel handling.

"Since around the FY results the CWU has issued a number of social media and other updates to its members concerning disagreements with Royal Mail," the bank said, adding that the situation appears to have deteriorated over time.

Royal Mail and the CWU are in dispute over several matters. This includes under what conditions the second-hour reduction in the working week will be granted, Royal Mail's planned parcel sorting strategy, its planned use of postal digital assistants for efficiency monitoring and the company's recent decision to move Parcelforce to a separate legal entity.

The external mediation process is expected to take eight weeks.

"The CWU has described this as the 'final stage of the resolution process'. Should this phase be unsuccessful, the union could ballot its members for industrial action, up to and including strike action," JPM said.

It noted that in 2017, the external mediation process led to an agreement between Royal Mail and the CWU, avoiding a strike. Should a strike go ahead this time around, JPM expects there to be both a direct and indirect cost, as customers move volume to other providers.

Even if a strike is avoided, this may indicate a higher level of cost inflation going forward, as RMG gives ground to union demands, JPM said.

JPM retained its 'neutral' rating and 252p price target.


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