- Profit upgrade not a big surprise

- Like-for-like sales slowing sharply

- Analyst see long-term threat from Amazon

Industrial and electronic products maker RS Group (RS1), formerly known as Electrocomponents, delivered an upbeat full-year trading update including a better-than-expected profit outturn.

However, the shares were the worst performers in the blue-chip FTSE 100 benchmark, sinking 4.4% to a nine-month low of 855p as the firm flagged a slowdown in revenue momentum in the three months to March albeit due to a strong prior-year comparison.

WHY ARE THE SHARES DOWN?

On the plus side, the firm said higher gross margins thanks to one-off price rises and a better operating margin thanks to tighter cost control meant operating profits for the year to March would be slightly ahead of the consensus forecast of £382 million.

It also sounded upbeat on the prospect for further market share gains and margin improvements, but in the context of a ‘more difficult market environment’.

The slowdown in revenues was quite obvious from the quarterly comparisons the company provided, with like-for-like growth of just 1% in the final quarter against 8% in the third quarter, 15% in the second quarter and 18% in the first quarter.

While some of this was down to tough year-over-year comparisons, that is not the whole story as like-for-like growth has clearly slowed in the Americas and Asia-Pacific in the last six months.

WHAT DO THE EXPERTS SAY?

Shore Capital analyst Tom Fraine wasn’t surprised by the upbeat profit guidance as ‘the company has a good record of managing consensus expectations, which has helped it deliver upgrades consistently and beat expectations for FY23 despite slowing revenue growth in Q4’.

However, Fraine is concerned profit margins for industrial distributors ‘may normalize to a greater extent than is forecast by consensus as supply chain issues resolve and smaller competitors are better able to source products’.

Moreover, long-term he sees Amazon Business posing a threat to the firm’s market share gains ‘due to its ability to deliver products very quickly’, one of RS Group’s key selling points.

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Issue Date: 05 Apr 2023