Royal Mail PLC (LON:RMG) shares have had their ‘sell’ rating removed by broker Liberum as the surge in parcel deliveries in 2020 has provided some “breathing space” for the group to sort out its long-term problems.

In the past month, the delivery company has upgraded its full-year profit guidance and has received a potentially encouraging update from regulator Ofcom about reducing its universal service obligation to five days rather than six.

“Execution risks remain substantial,” said Liberum analyst Gerald Khoo in a note to clients on Tuesday, “but the outlook is now more balanced.”

As a result, the broker’s recommendation has been upgraded to ‘hold’ and its target price increased to 320p from 165p.

“Even with a stronger base for parcels revenue, Royal Mail still faces the same underlying structural challenge. It struggles to grow Parcels revenue fast enough to deliver overall revenue growth in the UK that is fast enough to materially exceed cost growth. Without this, it cannot rebuild margins meaningfully,” Khoo said, giving the crux of his ongoing concern.

But, the lately stronger parcels revenue growth has given the group more room for manoeuvre and time to reformulate restructuring plans, agree them with the union and then implement them.

There is execution risk in management’s restructuring plans, with planned new parcel hubs behind their original schedule, while there are also potential cost headwinds from pay, with the CWU pushing for a bigger hike in light of the company’s less severe short-term financial position and poor productivity trends.

Royal Mail’s valuation remains “unattractive” in P/E terms, the analyst says, being almost 25 times March 2021 earnings and 24 times 2022 earnings, with free cash flow remaining weak too, though on a EV/EBITDA multiples looks more “reasonable”.