Royal Mail an­a­lyst fears are over­done

Bro­ker Beren­berg paints a pes­simistic pic­ture – but we are not con­vinced

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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.

WHAT IS THE BULL CASE FOR ROYAL MAIL?

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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