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Investing.com -- Shares of RS Group (LON:RS1R) dropped more than 5% on Tuesday after the company reported a tougher-than-expected performance for Q3.
The company reported third-quarter like-for-like (LFL) revenue declined by 1%, meeting analyst expectations. This represents an improvement from the 3% decline in Q2.
While EMEA remained weak, North America and Asia returned to growth, with respective increases of 3% and 1%.
Despite the ongoing challenges, RS Group maintained tight control over costs, which helped offset some of the softness in revenues.
The UK-based company reiterated that its gross margin and cost guidance remain unchanged, and it remains on track to deliver more than £30 million in annualised cost savings.
These savings are primarily driven by operational efficiencies and integration benefits, as well as cost-saving initiatives.
The company's outlook for the remainder of the fiscal year is more cautious. Management expects full-year profit before tax to be at the lower end of analyst expectations, around £247 million. RBC Capital Markets analysts share this view.
While RS Group had initially hoped for a better outcome in Q3, business sentiment remains weak, particularly in EMEA, which has been impacted by declining industrial production and weaker PMI data.
January trading was in line with the company's revised expectations, but there is still a lack of visibility in the market, especially given the uncertain macroeconomic conditions.
While analysts expect a recovery in the medium to long term, with the potential for share gains and improved margins, short-term risks remain, and the company faces some downside risk to its immediate financials.
RS Group's shares trade at a 2025 price-to-earnings ratio of 16.2x, an EV/EBITDA of 9.9x, a free cash flow yield of 5.4%, and a dividend yield of 3.5%.
Despite current challenges, the company maintains a strong balance sheet, enabling potential future mergers and acquisitions.
However, analysts' price targets and forecasts do not currently account for these potential acquisitions.
“We continue to see RS Group as positioned well for recovery in PMIs, and from 2026 onwards we expect to see a YoY benefit from the net impact of investment costs, restructuring costs and cost savings/efficiencies,” said analysts at RBC.
However, given the lack of clear visibility in the short term, there remains a cautionary tone around the stock.