Distributor RS Group continues to deliver

With supply chain pressures causing strife across so many sectors, it’s surprising that there have been so few signs of disruption at RS Group (RS1).

The distributor formerly known as Electrocomponents has had to spend £100mn more on inventory, particularly as it started the year with fairly depleted levels due to disruptions caused by Brexit and the Suez Canal blockage. It has also grappled with higher costs across the board, most notably shipping rates, which worsened as the year progressed and “show no signs of abating”, the company said.

Yet it has handled these challenges with seeming ease. Operating profit rose by 85 per cent, driven partly by higher sales but also a 1.5 percentage point increase in its gross margin to 44.2 per cent. This was achieved through keeping a keen eye on pricing and discounts.

Even after spending more on inventory, its free cash flow increased by £28mn to £161mn and net debt was cut by 65 per cent £42.1mn. Return on capital employed grew to 28.7 per cent, from 19.4 per cent a year earlier.

Trading across its three regions remained strong in the first seven weeks, although there has been a slight moderation in Asia Pacific due to lockdowns in Shanghai, chief financial officer David Egan said. However, China made up just 2 per cent of sales last year.

Broker Liberum expects a £25mn increase in adjusted pre-tax profit for its current financial year to £339mn, or 54.5p per share.

RS Group’s shares are 24 per cent lower now than at the start of the year and trade at less than 17x earnings – below their five-year average of 20x. Given the company’s solid trackrecord of taking bigger shares of a fragmented market, this seems like a decent opportunity to buy.

Last IC View: Buy, 1,163p, 12 Jan 2022