> 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. Modernisation and cost cutting are essential, but this will be difficult with weak GDP growth, Brexit risk, high wage pressures and union negotiations. ■ Still in the early phases of transformation. Postal and parcel network businesses are very complex, making restructuring very challenging. - Royal Mail lags behind Deutsche Post DHL by twenty years in terms of re-positioning the business to grow EBIT. ■ Royal Mail's medium- to long-term strategy is not entirely clear. There is no clarity on the geographic/business mix on a 5-10 year view: - 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. ■ FY Mar 18/19 profits could fall YoY. Mid-single digit volume decline in 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, employee wages and pensions and M&A are all greater priorities than shareholder return. ■ Dividend yield unattractive vs. peers. The 5.6% dividend yield is above UK market but below Austrian Post and PostNL at 6.3%, both of which have been restructuring for far longer. ■ Catalysts: further newsflow on union negotiations, trading update 18 January 2018 Related DB Research: Royal Mail: Moving to SELL — Harder to restructure (Chu), Transportation Outlook 2018: Going Places (Chug On-going transformation costs (FY P&L £'m) remain stubbornly high 300 250 200 150 100 50 0 At £137m, 19% of EBIT pre transformation costs 2011 2012 2013 2014 2015 2016 2017 Source: Company data RMG dividend yield (CY18) looks less impressive vs. peers 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Royal Mail Austrian Post Source: Deutsche Bank Research. ' Factset CC4nensus. as ol 22712/17 PostNL' CT