Royal Mail Set for FTSE 100 Comeback After Two-Year Hiatus

(Bloomberg) -- Royal Mail Plc is to return to the U.K.’s FTSE 100 Index as the 500-year-old company cements its position as a crucial component of Europe’s pandemic-driven e-commerce boom.

Following a three-fold price rally over the past 12 months, the stock will join the benchmark from May 28 as RSA Insurance Group Plc is deleted following its takeover, index provider FTSE Russell said in a statement Tuesday. Engineer Renishaw Plc is also expected to depart the large-cap gauge, according to indicative results of a quarterly review.

Royal Mail lost its blue-chip status in December 2018, but the Covid-19 outbreak has had a dual impact on its fortunes: it spurred a surge in parcel delivery demand from locked-down consumers, while paving the way for an agreement in principle with the Communication Workers Union, whose bargaining power was diminished by forecasts of a spike in unemployment. Years of labor negotiations had hindered the company’s efforts to boost productivity, weighing on the shares.

The shares had their best day in almost seven months Tuesday ahead of the update from FTSE Russell, rising 6.6% to close at 586.2 pence apiece.

New entrants to indexes benefit as so-called tracker funds boost their weightings, while demoted stocks are vulnerable to selling by funds whose aim is to mirror the performance of a gauge. If Renishaw’s relegation is confirmed, it would mark a short spell in the U.K. benchmark for the company, which was only added in March.

Royal Mail’s U.K.-focused unit delivered 1.7 billion parcels in the 12 months ended March, up 32% year-on-year, while the Amsterdam-based General Logistics Solutions division reported volume of 838 million, up 26%, the company said in its May 20 results statement. Amid a continued decline in letter volumes, parcels represented more than 70% of group revenue.

JPMorgan Chase & Co. analyst Samuel J Bland on Monday lifted his price target to 801 pence a share, the highest among analysts surveyed by Bloomberg and suggesting a further 48% upside from Friday’s close. Alongside the parcel boost, Bland cited the “much improved” union situation, noting that the company confirmed material cost savings in its results.

Peel Hunt analyst Alex Paterson on Tuesday upgraded his rating to buy from hold, citing the cost savings boost and a better revenue mix between parcels and letters. “A cultural change is also underway, which appears to be reducing bureaucracy and supporting a more harmonious relationship with staff.” Royal Mail said at its results that it’s working with the union on issues including parcel automation infrastructure and Sunday deliveries.

Still, while none of the 15 analysts tracked by Bloomberg recommends selling the shares, there are signs that the pandemic parcel boom is easing, with volume slipping 2% in April as in-store nonessential shopping was allowed to resume in England.

The lag between the indicative index changes and the actual announcement means that the stocks set to enter and drop out of the benchmark may change. The final revisions will be announced June 2, and become effective June 21, according to a FTSE Russell statement.

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