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Broker Berenberg paints a pessimistic picture – but we are not convinced
Thursday 31 May 2018 Author: Lisa-Marie Janes

Regulatory risks and intense competition are clouding parcel delivery service Royal Mail’s (RMG) outlook according to broker Berenberg as it slashes earnings forecasts.

Despite this negative analyst comment we are confident that Royal Mail remains an interesting contrarian play. Productivity improvements and cost-cutting measures, as well as overseas growth offsets any risks.

Berenberg analyst Joel Spungin has reduced his earnings per share estimates by 14% to 38p in the year to 26 March 2019 and by 12% to 38.4p in 2020.

He says uncertainty over how to comply with General Data Protection Regulation (GDPR) will prompt firms to rein in ‘unsolicited marketing.’ The analyst believes volume decline at the upper end of 4% to 6% in 2019 is likely to be a ‘best case scenario.’

Spungin estimates marketing mail accounts for between 10% and 20% of addressed mail volumes, speculating a 7% drop in volumes would hit overall letter volumes by 1% (£50m).

This is not the only risk to growth as competitors offering same-day and Sunday deliveries are problematic for Royal Mail, which does not provide these services. This could compound pricing pressures.

During the IPO in 2013, approximately 10% of shares in Royal Mail were given to full-time employees who will be able to sell their free shares tax-free in October, potentially hitting the stock in the short-term.


While GDPR is causing uncertainty and confusion, it is questionable whether companies would cut marketing instead of seeking advice prior to the regulations, which are now in place.

Shares in Royal Mail have enjoyed a 14.2% rally since the start of 2018, driven by a breakthrough in its pensions and pay troubles and robust full year results.

In the year to 25 March, operating profit before transformation costs rose 1% to £694m, beating consensus forecasts at £656m.

The strong performance was supported by consistent growth at overseas division GLS thanks to organic sales growth and acquisitions.

Investec analyst Alex Paterson says Royal Mail’s outlook has been transformed as it unlocks potential productivity improvements, flagging anticipated benefits from automation.

We remain confident in Royal Mail, which currently pays a generous dividend yield of 4.4%, and believe it can continue to recover despite the potential headwinds identified by Berenberg. (LMJ)

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