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

Market News

US equities fell heavily yesterday – S&P 500 (-1.5%); Nasdaq (-3.1%) – with the big rotation out of AI stocks into defensives. The Dow Jones (+0.7%) enjoyed its best relative daily performance against the Nasdaq since 2020. Nvidia fell by 17%, losing almost $600bn of its value, although it recovered somewhat post the market close.

The dollar advanced after US President Donald Trump said he wanted “much bigger” universal tariffs than the 2.5% said to be favoured by new Treasury Secretary Scott Bessent, adding to signals he is preparing widespread levies to boost the US supply chain. Trump also said he would soon put tariffs on foreign-produced semiconductors, pharmaceuticals, and some metals to compel producers to manufacture in the country.

US Economic data was solid – the Chicago Fed National activity surged, new home sales rose for second straight year, and the Dallas Fed manufacturing soared by the most since COVID. The 10-year Treasury yield slipped to 4.55%, while gold fell to $2,740 an ounce.

In Asia this morning, many markets were closed for holiday. Where there was trading, shares mainly fell as concern over high valuations in the AI sector stretched into a second day: Nikkei 225 (-1.4%).

The FTSE 100 is currently trading 0.3% higher at 8,504. The British Retail Consortium warned consumers to expect inflation to return in stores after food prices rose 1.6% year on year in January, the most in nine months. Gilt yields fell to 4.59%, while Sterling trades at $1.2440 and €1.1920.

Europe’s IPO pipeline is expected to expand in 2025 as valuations recover and volatility ebbs, according to PitchBook. More than 370 European venture capital-backed firms have a high probability of undertaking first-time share sales, a roughly 24% jump since April last year.

Source: Bloomberg

Company News

RS Group has released a trading update for the three months ended 31 December 2024. The statement highlights a difficult backdrop with a continued decline in revenue. Current trading remains subdued and full-year profit is expected to be at the lower end of the consensus range. 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 around £250. Customers are increasingly looking to consolidate spending 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.

Against a backdrop of weakness in global industrial production and the unwinding of unusual post-pandemic trading tailwinds, 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.

The group has targeted financial outcomes in the medium term of revenue growth of twice its market, mid-teen adjusted operating margin, cash conversion of 80%, and a sustainable return on capital more than 20%.

Today’s update highlights that trading in the December quarter was slightly below expectations, with group revenue down 3%. On a like-for-like basis, which excludes acquisitions, foreign currency, and trading days, revenue fell by 1%. This reflects declining industrial production and PMI data, and weaker trading in the second half of December due to more extended holiday-related plant shutdowns at many customers.

• The 3% decline in the EMEA region reflected softness in key markets consistent with weaker business sentiment and PMIs across the region. This was particularly true in the UK, where the company has seen a material slowdown from the beginning of November.

• LFL revenue in Americas grew by 3%, mainly due to improvement in the US and strong sales growth in Mexico.

• Asia Pacific revenue grew by 1%.

The company is implementing its strategic plan at pace and making good underlying progress with improvements to its digital and technology platform, product and own-brand offer, and customer service capabilities. This is driving continued share gain in most product categories. The group’s operational efficiency initiatives and integration benefits are in-line or ahead of plan, and RS is on track to deliver annualised cost savings in excess of £30m this year. The multi-year investment programme to improve process and systems efficiencies is also progressing well.

As expected, there was no update on profitability or the group’s balance sheet with today’s statement. At the end of September 2024, gearing was a comfortable 1.3x net debt to adjusted EBITDA. The company pursues a progressive dividend policy while remaining committed to a healthy dividend cover.

Given tight cost control, the group has reiterated its gross margin and cost guidance. However, the softer than expected Q3 revenue performance and weak business confidence in EMEA will likely result in full-year profit before tax being around the bottom end of the consensus range of £247m-£274m.

January trading is in line with the group’s revised expectations, and the company will continue investing in its key strategic initiatives whilst managing costs effectively in this difficult trading environment which is expected to continue until we see a more sustained improvement in PMIs.

Source: Bloomberg