Broker tips: Senior, Royal Mail

(Sharecast News) - Analysts at Berenberg lowered their target price on aerospace and defence outfit Senior from 180.0p to 150.0p on Wednesday, stating that while the firm was "well-positioned", its shares also appeared to already be "fairly valued". Berenberg said Senior's full-year 2021 results demonstrated a "good operational performance", with revenues and profits in line with January's pre-release, and said cash was again the standout, driven by management's ongoing control of working capital and capex further strengthening the balance sheet.

The German bank also highlighted that Senior's plan to reinstate its dividend in 2022 indicated confidence in the outlook, in its view, backed by good order intake.

"We, therefore, believe the group remains well-positioned to benefit from the ongoing recovery in its core markets," said Berenberg.

However, the analysts stated they already consider the shares to be fairly valued, trading in line with the European civil aerospace sector at 14.0x 2024 price-to-earnings ratio.

Liberum downgraded its stance on Royal Mail on Wednesday to 'sell' from 'hold' and cut the price target to 355.0p from 470.0p as it pointed to a margin squeeze risk from pay inflation ahead of the company's pay negotiations with trade union CWU.

The broker noted that the CWU has recently submitted its pay claim for the coming year. While the figure requested was not disclosed, the union is looking for an unconditional pay rise to match inflation.

"With retail price inflation currently at 7.8%, we see a risk of a margin squeeze for the group if a pay deal is agreed anywhere close to that level," Liberum said.

"Even linking a pay hike to productivity might not be enough to defend margins, with a 3% improvement being the best the UK business has achieved.

"Historically, the best rates of productivity improvement achieved by the UK business have been 2-3% per annum. It has struggled to deliver that of late."

The broker has cut its forecasts for March 2023 and 2024 to reflect concerns about higher UK wage inflation that cannot be fully offset by price increases or productivity improvements. It said the revised forecasts are likely below or near the bottom end of the consensus range.