ii view: Rentokil’s core North American market disappoints again

First-quarter trading update to 31 March

• Currency adjusted revenue up 3.1% to £1.29 billion
• North American organic sales up 1.5% to £761 million

Guidance:

• Continues to expect full-year North American organic sales growth of between 2% and 4%, weighted towards the second half

Chief executive Andy Ransom said:

"We have made a positive overall start to 2024. The Group has performed well and our RIGHT WAY 2 plan has delivered a stabilising performance in North America. With the key trading period for the business ahead of us, we remain confident in delivering on our guidance of 2-4% Organic Revenue growth in the region.

"As the year proceeds, we look forward to continued progress, driven by our focus on North America growth and the Terminix integration plan, which is in the advanced stages of preparation for the first full branch integrations commencing mid-year."

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ii round-up:

Pest control and hygiene provider Rentokil Initial (LSE:RTO) today detailed sales growth at its core North American business below its previous guidance, although the company remains confident the region can achieve growth of 2-4% for the full year.

First-quarter currency adjusted revenues to 31 March rose 3.1% to £1.29 billion, with North American sales stripped of acquisitions rising 1.5% to £761 million, below management’s previous forecast of 2% North American growth for the quarter.

Shares in the FTSE 100 company fell 6% in UK trading having come into this latest news down around a quarter over the last year. That’s in comparison to a near 0.5% decline for the FTSE 100 index itself and a gain of one-fifth for the S&P 500 index. 

In 2022, Rentokil bought US rival Terminix for $6.7 billion (£5.8 billion), doubling its US staff count and adding many more customers to become the global leader in pest control. 

Pest Control services in the US for commercial, residential and termite customers grew 1% during the quarter, down from 1.2% in the prior fourth quarter and 2.7% in Q3 2023.

Total US revenue for 2023 including other products such as cleaning services accounted for three-fifths of overall group sales, up from just over two-fifths in 2020. 

Sales at its combined Europe and Latin American region during the quarter climbed 6.2% to £274 million, with sales for the combined UK and Sub-Saharan Africa region up 4.1% to £103 million.

First-half results are scheduled for 25 July. 

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. Pest control generates most of its profits at around 80%, with hygiene and wellbeing 15%, and French workwear the balance of 5%. Bolt-on acquisitions remain a management focus, with eight deals made during this latest quarter including the purchase of HiCare Services, India’s second-largest pest control company.

For investors, slower-than-expected North American sales raise uncertainty over the group’s potential to hit current full-year guidance. Large company integrations can prove problematic, costs for businesses generally including wages are now elevated, while currency risks given its significant overseas earnings warrant consideration. 

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On the upside, integration of its Terminix acquisition continues with expected savings recently increased by $50 million 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, while increases in the dividend over the past three years plus a modest yield 2% are not to be overlooked. 

Today's news follows a previous warning on North America last October, which wiped 20% off the company's valuation. This latest update is another blow for shareholders, and a rally during March has now completely unwound. Concerns about the demand outlook in the US persist, although investors with an appetite for risk might put the shares on their radar given they're now trading close to a four-year low, and with the current consensus analyst fair value above 550p per share.

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