RS Group relishes calm before the storm

RS Group’s (RS1) first-half results showed an uptick in both revenue and profits – in addition to consensus-beating earnings per share and gross margins. So why did its share price slump more than 8 per cent on the day of its interim report?

The answer lies in investors’ assumption that there is trouble in the group’s upper ranks. Alongside its interim results, the group also revealed that its CEO, Lindsley Ruth, would be taking an immediate leave of absence for personal reasons. As Jefferies analysts note, the shares pulled back by around 10 per cent last time this happened in November 2019.

But the group’s underlying business remains healthy – at least for the moment. Its first-half free cash flow figure of almost £112mn was 10 per cent above expectations. Return on capital employed – a ratio that measures a company’s ability to use capital to generate profits – improved by 6.7 percentage points.

RS said that trading over the first four weeks of the second half has been in line with its expectations. However, Jefferies recently downgraded earnings per share estimates to 8 per cent below consensus for the 2024 financial year. Its analysts said that short-cycle headwinds have only been gathering since.

“Semiconductor warnings have proliferated, driven by a slowdown in demand for personal devices and exacerbated by US action to rein in China’s chipmaking power,” they wrote in a 3 November note. The analysts also noted that this weakness was broadening out into industrial equipment and the manufacturing the purchasing managers' index has further softened. 

RS's shares are currently trading at nearly 16 times earnings, lower than the company’s five-year average of 21.5 times, but we think they may yet have further to fall. Hold.

Last IC View: Buy, 915p, 24 May 2022