RS Group: recovery story needs spark in electronics market

An ugly set of numbers from distributor RS Group (RS1) weren’t helped by an underwhelming outlook. 

The company reported a 27 per cent slide in operating profit to £280mn on the back of an 8 per cent drop in like-for-like sales, which chief executive Simon Pryce blamed on weak global industrial demand, an electronics cycle that moved from peak to trough and the reversal of post-pandemic tailwinds that on the company’s calculations generated a prior-year excess operating profit of £60mn.

Return on capital employed slumped to 17.4 per cent, from 30.8 per cent, which the company said was also partly due to acquisitions. It spent £325mn buying Distrelec last year, which was the main reason net debt rose by more than £300mn to £418mn. This is still only 1.1 times adjusted cash profit, though – at the bottom end of its target range of one to two times.

The issue for RS is that, in the short term at least, market conditions don’t appear to be getting better. It is therefore focused on wringing more out of what it already has, working on better utilisation of its distribution centres and accelerating the integration of Distrelec. It is also planning to invest an extra £15mn in each of the next two years to “personalise our digital customer experience”. 

Shore Capital analyst Tom Fraine cut his profit forecast for the current financial year by 12 per cent and said he expects brokers' consensus views to fall by the same amount. RS Group’s shares trade at 17.3 times forecast earnings – a discount to their five-year average of 18.3 times, but not a big enough one to buy back into what remains a recovery story. Hold.

Last IC view: Hold, 700p, 7 Nov 2023