Morning Note: Market news and an update from distributor RS Group.

Market News

The Federal Reserve’s Christopher Waller said a continued softening in data over the next three to five months would allow the Fed to consider lowering rates at the end of 2024. Susan Collins indicated she wants more evidence price pressures are moving toward the central bank’s target. Swaps are now pricing in around 40 bps of cuts this year, down from 50 bps. The 10-year Treasury yield ticked up to 4.45%, while gold slipped to $2,415 an ounce.

US equity markets were little changed last night – S&P 500 (+0.3%), Nasdaq (+0.2%) – ahead of tonight’s results from Nvidia. This morning in Asia, markets were mixed: Nikkei 225 (-0.9%); Hang Seng (+0.2%); Shanghai Composite (+0.1%). Japan’s 10-year bond yield touched 1% for the first time in more than a decade. The FTSE 100 is currently trading 0.5% lower at 8,363. BHP has until 5pm today to make an offer for Anglo American or walk away.

UK CPI inflation slowed less than expected in April: +2.3% vs. +2.1% expected. The core measure was +3.9% (vs +3.6% forecast), while services inflation was +5.9%, well above the +5.4% expected. The reading will fuel doubt about when the BOE can start cutting rates. Sterling has risen in response to $1.2750 and €1.1730.

The Bank of England is urging markets to prepare for a big rise in repo operations, while the IMF has warned the UK Treasury needs £30bn more to stabilise its debt.

Beijing is hinting at a 25% levy on US and European cars, according to the China Chamber of Commerce to the EU. That comes ahead of a 5 June deadline in the European Commission’s probe into Chinese EV subsidies.

Source: Bloomberg

Company News

RS Group has this morning released results for the financial year ended 31 March 2024. Although profitability was slightly better than expected the outlook for the current financial year remains subdued. In response, the shares are down 6% in early trading.

RS Group (previously Electrocomponents) is global distributor of product and service solutions, helping its customers globally maintain, repair, and operate industrial equipment and operations. The group’s range comprises more than 750,000 products, sourced from over 2,500 suppliers. It has more than 1.1m customers with average order value of £257. Customers are increasingly looking to consolidate spend with fewer partners who can offer best-in-class capabilities in terms of product range and service. As a result, the group has outperformed a highly fragmented £400bn global market.

Today’s results reflect weakness in global industrial production and the unwinding of unusual post-pandemic trading tailwinds. In response, the group has simplified its operating model and reduced its cost base. These actions will improve the fundamentals of the business and will support stronger and more sustainable outperformance when markets return to growth.

In the year to 31 March 2024, revenue fell by 1% to £2,942m, with M&A adding a 10% benefit and currency a 2% headwind. In like-for-like (LFL) terms, revenue fell by 8%.

Industrial products and service solutions, 81% of group revenue, fell by 4% LFL, driven by the challenging economic environment. Electronics products and solutions fell 22%, reflecting the tough comparatives in the prior period due to the very strong performance over the last two years and the unwind of price inflation.

The group generates around 61% of revenue from eCommerce, with digital LFL down 6% in the period. RS Pro, the group’s own-brand business, generated LFL revenue growth of 3% as the brand extended its product breadth by c. 8,000 and focused its end-to-end sales and marketing in the regions. It now accounts for more than 13% of group revenue. Service solutions revenue, associated with 24% of revenue, increased by 3% LFL.

The group’s gross margin is underpinned by its specialist service proposition. However, during the year it fell by 110 bps to 43.0% as anticipated due to the reversal of inflation benefits. The operating margin declined from 13.5% to 10.6%, reflecting the gross profit decline and active cost management. The group generated in excess of £30m of annualised savings. Adjusted operating profit fell by 25% in LFL terms to £312m, slightly better than the £309m market forecast. Adjusted EPS fell by 34% to 38.8p.

Free cash flow declined sharply from £264m to £151m, pushing net debt up from £113m to £418m, although gearing is a comfortable 1.1x net debt to adjusted EBITDA. The company pursues a progressive dividend policy while remaining committed to a healthy dividend cover. For this year, the payout has been raised by 5% to 22p (3% yield).

With less than a 1% share of its total addressable market, RS wants to accelerate its growth with high-quality acquisitions that have a compelling fit and the statement highlights an active pipeline of potential acquisition opportunities.

Looking to the current financial year to March 2025, the company highlights that demand is stabilising, but remains subdued, with limited short-term visibility. Whilst lead indicators suggest some market improvement in the second half of the financial year, the company is focusing on improving its operating efficiency and leverage and investing where it can accelerate its growth. During this period of investment, the group expects some short-term operating profit margin dilution reflecting a partial resumption of the employee annual incentive, ongoing cost inflation, annualisation of Distrelec costs, and the additional £15m organic investment announced today. The group expects its pricing strategy to offset the costs of goods sold inflation.

Source: Bloomberg