David Walton: Why we’ve added R&S Group to our portfolio

We first bought the stock at the beginning of the year and have subsequently added to our position. The company is performing well, and since our initial purchase the share price has doubled.

R&S Group makes small to medium-sized transformers and its largest markets are Switzerland, Poland, Italy and Sweden. It also sells in Finland and the Czech Republic and is expanding into Germany.

These transformers can be used by wind farms and solar power facilities to ‘step up’ the voltage of electricity when they feed it into the grid. They are also used in sub-stations to ‘step down’ the voltage of electricity from the grid, so it is ready to be used in consumers’ homes.

R&S Group is benefiting from two strong and interconnected trends. The first is the rapidly growing use of electricity to power everything from industrial processes to family cars, as fossil fuel consumption is reduced to help cut carbon emissions.

The second is the multi-decade transformation of Europe’s electricity production network, as giant fossil-fuel consuming power stations are replaced with a large number of much smaller renewable energy facilities in a wide range of new locations.

With more and more renewable energy producers coming online, this is creating strong multi-year demand for R&S Group’s transformers.

The company’s tight focus on a market with robust growth prospects is a key attraction for us. While larger companies such as ABB and Siemens also have exposure, it is only as part of a much broader spread of products.

R&S Group also has strong pricing power, because only a limited number of companies can make these transformers. They have to be custom built to meet the specifications of each individual project, which reduces the risk of a new entrant moving into the market with cut-price mass-produced transformers.

In August, the company announced the acquisition of Irish transformer maker Kyte Powertech. We believe this will provide valuable synergies, in terms of cost savings and cross-selling of products. Removing a competitor is also likely to mean greater pricing power.

The company has a relatively new CEO, Markus Laesser, who has overseen a restructuring programme to improve performance. Results were strong for 2023, and management were guiding that earnings before interest and taxes this year would be between 16% and 18% higher. Following the Kyte acquisition, we would now expect a meaningful additional increase in earnings.

R&S Group is a good example of us using detailed research to uncover a high-quality, well-managed European company with strong growth potential that has been overlooked by the vast majority of investors. We believe this is a business with excellent growth prospects.

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This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.