RS Group shake-up could save £30mn a year

There’s a lot that’s currently going against RS Group (RS1), the distributor formerly known as Electrocomponents.

The company cited a multitude of reasons for weaker half-year results, including “continuing geopolitical uncertainty, ongoing deterioration in manufacturing PMI data globally, industry destocking particularly in electronics, supply chain normalisation, reducing price inflation and ongoing cost inflation”.

Yet, while it’s true that as a distributor to industry it is more exposed to market cycles than most, not all of its problems are external. It has been through a period of upheaval at the top of the organisation and new chief executive Simon Pryce clearly thinks it is too top heavy, citing a cost structure that “needs to be more closely aligned to our market and strategic opportunity”. Across the board, a simplified operating model is planned, with job cuts already under way as it reorganises its underperforming Americas and Asia-Pacific businesses. The company thinks it can achieve £30mn of annualised savings, although there will be an upfront cost to achieving this of £15mn this year.

And herein lies the issue for investors. Although Pryce talked up the “exciting growth opportunity” over the long run, earnings per share for the first half were well below analysts’ expectations. The £325mn Distrelec deal offers promise but so far all it has done is inflated its debt pile – net debt rose to £502mn, from £113mn six months earlier. Its interest charge for the full year is expected to rise to £30mn, up from £12.6mn last year.

As such, although RS Group’s shares are now priced at 15 times broker Shore Capital’s forecast earnings – below their five-year average of 18 times – we think there may well be more short-term pain before they start to make long-term gains. Hold.