EFTA01385539.pdf

> BLT Deutsche Bank Q Royal Mail - Andy Chu, SELL, close 454p, 359p tgt, 21% downside ■ It will be tougher to restructure in the coming twelve months. On-going transformation costs (FY P&L £'m) remain stubbornly high Modernisation and cost cutting are essential, but this will be difficult with weak GDP growth, Brexit risk, high wage pressures and union negotiations. 300 ■ Still in the early phases of transformation. Postal and parcel network 250 businesses are very complex, making restructuring very challenging. - Royal Mail lags behind Deutsche Post DHL by twenty years in terms of 200 re-positioning the business to grow EBIT. 150 ■ Royal Mail's medium- to long-term strategy is not entirely clear. There is no 100 At £137m, 19% of EBIT clarity on the geographic/business mix on a 5-10 year view: 50 pre transformation costs - While M&A has been focused in GLS in Europe, there have also been bolt-on acquisitions in the US where we see few large-scale synergies. 0 ■ FY Mar 18/19 profits could fall YoY. Mid-single digit volume decline in 2011 2012 2013 2014 2015 2016 2017 Source: Company data addressed mail likely to offset strong growth in GLS and modest UK parcel growth. ■ Shareholders are not near the top of the stakeholder list. Restructuring, RMG dividend yield (CY18) looks less impressive vs. peers employee wages and pensions and M&A are all greater priorities than 10% shareholder return. 9% ■ Dividend yield unattractive vs. peers. The 5.6% dividend yield is above 8% UK market but below Austrian Post and PostNL at 6.3%, both of which have 7% 6% been restructuring for far longer. 5% ■ Catalysts: further newsflow on union negotiations, trading update 18 4% January 2018 3% 2% 1% Related DB Research: 0% Royal Mail: Moving to SELL — Harder to restructure (Chu), Royal Mail Austrian Post PostNL' CT'.. Transportation Outlook 2018: Going Places (Chug Source: Deutsche Bank Research. ' Factset CC4nensus. as ol 22712/17 Deutsche Bank Research• European Equity Focus - January 2018 4D CONFIDENTIAL - PURSUANT TO FED. R. GRIM. P. 6(e) DB-SDNY-0086825 CONFIDENTIAL SDNY_GM_00233009 EFTA01385539