Junk mail fall post-Brexit deals latest blow to Royal Mail

A fall in spending on junk mail by companies rattled by Britain's vote to leave the European Union hit Royal Mail's first-half profit on Thursday, pushing it to pledge to further limit its costs and knocking its shares.

The former state-owned monopoly is battling competition from new entrants and former customers such as Amazon, which has started its own delivery system, as it seeks to modernise and regain business in the overcrowded parcels market.

Although Royal Mail has replaced all Amazon business lost by signing up new retailers, concerns still remain as DHL is ramping up competition and its owner Deutsche Post is muscling into the market by purchasing rival UK Mail.

Royal Mail, which was floated in 2013, needs to make more money from parcels to offset falls in its mail business, with households and businesses sending fewer letters.

It posted a 5 percent drop in first-half profit, with growth in its parcels business not enough to offset a 6 percent deterioration in second-quarter letter volumes.

"We have doubts that parcels revenue can fully offset the secular decline in letters revenue," Liberum analysts wrote, adding that Royal Mail's share price already priced in any future growth.

Royal Mail's chief executive Moya Green told Reuters its domestic marketing mail business had seen a drop-off in activity as businesses grew cautious on their advertising spending following the Brexit vote.

Britain cut its 2017 economic growth forecast after the surprise referendum outcome and Green said the letters business was very "sensitive to rates of economic growth".

Green said Royal Mail would now begin to skew more of its spending towards winning business rather than investing in technology to catch up with rivals as it reaches the end of a three-year transformation programme.

Royal Mail's operating profit before transformation costs fell to 320 million pounds in the half-year to Sept. 25, below some analysts' expectations.

Some also questioned whether it would be able to match a full-year profit consensus of 732 million pounds, with its results now more weighted than usual towards the second half, when trading is more volatile due to Christmas.

Royal Mail said its full-year outcome would be dependent on Christmas trading, Green declined to give any details.

"Letter weakness still needs to be offset with growth in the highly competitive parcels arena," said Mike van Dulken, head of research at Accendo Markets.

Royal Mail's shares, which floated at 330 pence, fell as much as 7.5 percent to 461.4 pence.

The company said it expected to avoid 600 million pounds in annualised costs over three years to March 2018, versus a previous target of 500 million pounds, while it estimated the costs associated with its UK transformation to be between 130 million and 160 million pounds for the year to March 2017, down from a previous forecast of around 160 million.

Royal Mail's rival UK Mail posted lower six-month revenue, but said it was confident heading into Christmas.

(Editing by Alexander Smith)


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