Join our community of smart investors

Royal Mail GDPR risks unreflected in valuation

Falling letter mailing volumes could be made worse by the introduction of new data protection rules
July 17, 2018

It’s difficult to forecast what impact the new data protection rules (GDPR) – which require consent from individuals before their personal data can be processed – will have on Royal Mail's (RMG) letter volumes. Management already expects the volume of addressed letters to fall by between 4 per cent and 6 per cent a year, but added in its Q1 update this week that the decline would be at the top end or higher of the given range this year, due to the uncertainty around the new data rules. That's partly because the regulation could result in fewer addressed letters being sent, which Royal Mail can charge more for than unaddressed mail.

IC TIP: Sell at 495p

During the first quarter, letter volumes were down 6 per cent, leading to a 7 per cent fall in revenue in the division. This meant that parcel volumes and sales growth of 7 per cent and 6 per cent, respectively, was not enough to offset the deterioration in letters volumes at the group level. This is despite the growing popularity of ordering (and returning) goods online, which aided the 24 per cent improvement in tracked parcels. Overall, Royal Mail’s revenue fell 1 per cent during the three months to 24 June. 

Despite the tepid sales figures, the shares closed the day 3 per cent up. Shareholders may be taking comfort that Rico Back took over from Moya Greene as chief executive last month. Mr Back previously ran Royal Mail’s smaller GLS logistics business, which continues to report growth in both sales and volumes. During the first quarter volumes sent through GLS were up 10 per cent and sales improved 11 per cent, with strong growth in Italy, Spain, and Denmark.

But investors may have some bad news on the way in this division, as management warned that labour pressures across many of the GLS markets could lead to lower margins at the full year. Analysts at Liberum are sceptical that increasing labour costs across the business can continue to be offset by productivity gains. Management has been vague on details of how it plans on improving productivity after announcing a shorter working week for employees. Liberum analyst Gerald Khoo suggested that the market’s positive reaction to the update was simply because there was “no new bad news”, since the potential impact of GDPR had first been discussed at the full-year results in May.