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Berenberg downgrades Royal Mail as growth and profit risks increase

Royal Mail was under the cosh on Friday as Berenberg downgraded the stock to 'sell' from 'hold', saying risks to the company's growth and profitability outlook are increasing once again.
"Regulatory change presents another headwind for mail volumes, while intense competition threatens revenue growth in parcels. Combined with various other cost pressures, we see little profit growth over the next three years."

Royal Mail highlighted the risk from adoption of the GDPR and said that the rate of volume decline might be at the upper end of the usual 4% to 6% range.

Berenberg said this was likely to prove to be a "best case" scenario.

"Companies are very uncertain about how to comply with GDPR and there is a strong possibility that they will temporarily rein in their marketing activities rather than risk breaching the regulations. We estimate that a 20% reduction in marketing volumes could hit overall mail volumes by an incremental 2%, or about £80m of revenue."

The bank cut its FY19 and FY20 earnings per share forecasts by 14% and 12% to reflect its concerns about growth and margins. As a result, Berenberg is now 7% and 8% below consensus.

"We think much of the recent re-rating will likely reverse, if trading disappoints," it added, keeping its 460p price target on the stock unchanged.

At 1550 BST, the shares were down 3.3% to 527.40p.

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