ii view: here's what's behind Rentokil share price plunge

Trading update

• Second-half North American organic sales now expected to rise 1%, down from a previous 2-4%
• Group full-year adjusted profit now expected to be around £700 million, down from City hopes of around £780 million

ii round-up:

Pest control and hygiene provider Rentokil Initial (LSE:RTO) today published a surprise trading update, lowering its expected profit outcome for the 2024 financial year to late December. 

Weak summer trading at its core North America business as well as integration disruption following the 2022 acquisition of Terminix, is now expected to see second-half sales for the region grow by just 1%. That’s down from management’s previous hopes of 2-4%. Overstaffing in anticipation of peak season growth now sees Rentokil estimating annual adjusted profit of £700 million compared with £780 million forecast by City analysts.   

Shares in the FTSE 100 company plunged by close to a fifth in UK trading to a four-year low, having come into this latest news up by about 8% year-to-date. That compares to a gain of around 6% for the FTSE 100 index in 2024. 

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North America sales accounted for close to 60% of revenue in 2023, boosted by its prior $6.7 billion (£5.8 billion) purchase of Terminix and doubling its US staff count. Sales for the region in 2020 totalled 44%. 

As well as wage costs, higher-than-expected spending on materials and consumables added to profit margin pressures in North America. Lower-than-expected regional sales shaved around £20 million off profit hopes, with increased costs a further £50 million and currency headwinds £10 million. 

Corrective action by Rentokil remains focused on its ‘Right Way 2 Plan’ initiatives, including boosting sales and customer retention, rightsizing staff numbers and managing inventory more effectively.  

Operations away from North America continued to perform well. Third-quarter results to 30 September are scheduled for 17 October. 

ii view:

Started in 1925, Rentokil today operates across the two core divisions of pest control and hygiene and wellbeing, as well as a small work wear business in France. Headquartered in Crawley, Sussex, Pest control generated most of its sales in 2023 at 80%, with hygiene and wellbeing a further 16%, and work wear the balance of 4%. 

For investors, performance at its enlarged North America business continues to disappoint. Large company acquisitions such as its previous purchase of Terminix are not without risk and can prove problematic. Costs for businesses generally, and particularly for wages, are now elevated, while currency risks given sizeable overseas earnings create headwinds. 

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To the upside, expected cost savings from Terminix were raised by $50 million during the first quarter to $325 million. Pest Control is a largely non-discretionary and essential service for customers such as those in hospitality. Smaller bolt-on acquisitions continue to be made including India’s second-largest pest control company earlier this year, while a forecast dividend yield of around 2% is not to be forgotten. 

In all, increased exposure to the world’s biggest economy, the USA, and further potential integration cost savings continue to underpin longer-term potential. That said, while investors happy to take big risks might bet that the selling is overdone, others are likely to await evidence of an improved performance at the core US business before making any decisions.    

Positives: 

• Diversity in both business type and geographical location
• Pest Control is a largely non-discretionary and essential service

Negatives:

• The weather can influence performance
• Currency movements can impact

The average rating of stock market analysts:

Strong hold