ii view: Rentokil reassures with more turnaround plans

Third-quarter trading update to 30 September

• Total currency adjusted revenue growth of 3.6% to £1.44 billion
• Organic revenue growth of 2.6%
• North American organic revenue growth of 1.4%

Chief executive Andy Ransom said:

“In North America, we recognise the business has underperformed and we are focused on delivering the operational improvements required. We are expanding our initiatives to increase organic growth and we are taking action to mitigate cost overruns.”

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ii round-up:

Following a profit warning in September, pest control firm Rentokil Initial (LSE:RTO) today flagged expectations for full-year trading that matches its recently adjusted expectations.  

Third-quarter sales growth, stripped of acquisitions, climbed 2.6% from a year ago, buoyed by strength in Europe, the UK and Asia. Sales on the same basis for the core North American business, accounting for almost 60% of revenues in 2023, rose 1.4%, ahead of City forecasts for 1%.  

Shares in the FTSE 100 company rose 9% in UK trading having come into this latest announcement down by close to a quarter year-to-date. That’s significantly below an 8% improvement for the FTSE 100 index. 

In late 2022, Rentokil acquired North American pest control provider Terminix for $6.7 billion (£5.8 billion), doubling its US staff count and increasing sales in the region from 44% in 2020.

Rentokil pointed to a strengthening of its plans to accelerate North American organic sales growth and readjust costs. The region’s management team had been fortified with a review into the integration of Terminix now to be launched in early 2025. 

The Crawley headquartered company will also pilot the opening of at least 10 new satellite branches in key metro areas, aimed at assessing the value of a physical presence to customers.

Customer digital lead flow volumes had markedly improved in the second half of September despite lower sales rates. North American staff retention improved further, rising to 78.5% from 77.8% in late June.  

Full-year results are scheduled for 6 March. 

ii view:

Rentokil is a global market leader in pest control for commercial customers and the leading player in North America by market share. It also operates across the residential arena. Pest control generated 80% of sales during 2023, with hygiene and wellbeing services a further 16%. A small French workwear business made up the balance of 4%.

For investors, third-quarter North American organic sales of 1.4% are down from earlier year management hopes as high as 4%. Large company acquisitions such as that for Terminix are not without risk and can be problematic. A review of the Terminix integration is now expected to see the timing of previously planned cost savings delayed by up to three months, while costs for businesses generally, and particularly wages, are now heightened due to global inflation. 

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More favourably, a high focus on improving the performance of the core North American business is being made. Pest Control is largely non-discretionary and an 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 2.5% is not to be ignored. 

For now, increased exposure to the world’s largest economy, the USA, and further likely cost savings provide grounds for longer-term hope. That said, and despite some current reassurance, more cautious investors are likely to await firmer evidence of recovery in North America before committing fresh funds.   

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