Row over privatisation may escalate over 12-month target after bank had advised government to float business at just 330p
Goldman Sachs has risked a further escalation of the Royal Mail privatisation row by putting a price target on the shares of 610p despite telling the government that the business should be floated at 330p last month.
Analysts at Goldman said the postal group's valuation should benefit from an increase in parcel deliveries, despite falling letter volumes.
The investment bank's 12-month price target of 610p represents an 85% premium on the flotation price, and gave further ammunition to those critics of the privatisation who argue the government sold off Royal Mail too cheaply.
Chuka Umunna, the shadow business secretary, said: "This raises yet more questions for ministers on their apparent failure to secure maximum value for the taxpayer in the Royal Mail fire sale.
"While Vince Cable has dismissed concerns that taxpayers may have been short-changed by hundreds of millions of pounds as 'froth', analysts at the bank which advised the deal are predicting that it could rise still further."
If Goldman is correct the company's value would rise to just above £6bn in a year's time, compared with its flotation value of £3.3bn.
Meanwhile Adrian Bailey, chairman of the business, innovations and skills committee, said there were "further questions that need to be asked" following the publication of the Goldman note.
"It confirms I think all the suspicions that between what the advisers were telling the government and what the advisers really felt was the potential of the company there was an enormous variation," Bailey told IB Times.
He added: "You have to question why there is this analysis now and another analysis at a much lower price that they defended vigorously only just over a week ago. What's happened that's different and what information is different now than what they had before?"
The analysts who produced the note are separate from the bankers who advised the government on the sale.
Goldman analysts, who gave Royal Mail a "neutral" rating, predicted a 7.7% rise in annual UK parcel revenues between 2013 and 2017, largely as a result of growth in online shopping. They predicted parcels will account for 57% of group revenues in 2017, up from 48% in 2013.
"With further modest growth coming from EU parcels we expect group parcel growth to more than offset continued letter volume declines," analysts said in the note.
"We forecast network modernisation (parcel automation and logistics optimisation) to drive productivity improvements and facilitate headcount reduction, delivering further margin improvement."
On the other hand, letter volumes are expected to decrease by 5.1% a year over the period.
Goldman said its analysis did not include the threat of future strike action by Royal Mail workers, considering the short-term risk of a strike as relatively low, although it acknowledged the potential for industrial action could be an ongoing investment risk. The threat of strike action has been cited by Cable as one of the reasons why the shares were sold at no higher than 330p.
Goldman added that other risks included a faster than expected decline in letter volumes, a delay in cost cutting, and proposed European Union data protection legislation, which could limit the ability of companies to engage in direct marketing.
Cable insisted on Wednesday that Royal Mail had not been sold too cheaply when questioned by members of the BIS committee.
Cable and Michael Fallon, the business minister who handled the flotation, said they decided against increasing the sale price by 20p a share because the market was already jittery over a potential US debt default.
Senior executives from Goldman were among those to be questioned last week by the same committee, over their role in advising the government on the flotation.
Royal Mail shares surged by more than a third on the first day of trading and have risen further since then to more than 560p.