ii view: resilient Rentokil chased higher after annual results

A major takeover in 2022 added to ongoing smaller bolt-on acquisitions at this FTSE 100 company. Buy, sell, or hold? 

Full-year results to 31 December

• Revenue up 26% to £3.7 billion
• Currency adjusted operating profit rose 23% year-over-year to £542 million
• Final dividend of 5.15p per share
• Total 2022 dividend up 18% to 7.55p per share
• Net debt of £3.3 billion, up from £1.29 billion at start of 2022

Guidance:

• Now expects cost savings from Terminix acquisition of at least $200 million by FY 2025, up from $150 million

Chief executive Andy Ransom said:

"We continue to successfully manage cost inflation, while driving investment in our services and people to sustain high levels of customer and colleague retention.

“All of this has been achieved alongside the landmark acquisition of Terminix, reinforcing Rentokil Initial as the largest pest control company in the world. Early progress on integration has been excellent."

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ii round-up:

Pest control and hygiene provider Rentokil Initial (LSE:RTO) today raised expected cost savings from its $6.7 billion (£5.8 billion) takeover of US rival Terminix. 

It now anticipates savings of at least $200 million (£166 million) by 2025, up from its previous estimate of $150 million (£125 million). Buying Terminix more than doubled its staff count and added significant new customer numbers to Rentokil’s base, leaving it as the global leader in pest control. 

Rentokil shares rose by 8% in UK trading having fallen by 13% over the course of 2022. That compares to a decline of almost 20% for the FTSE All World index and a fall of 33% for the US tech-heavy and growth focused Nasdaq index.

Full-year 2022 results for the FTSE 100 company proved broadly in line with City expectations. A 19% sales boost from acquisitions including that of Terminix added to the 6% organic annual growth achieved.

Price increases helped counter elevated costs with demand remaining resilient. Pest Control is a largely non-discretionary and essential service for customers such as those in hospitality. 

Sales in relation to its Covid disinfection business fell to £20 million from a pandemic boosted £117 million in 2021. 

Given robust sales and the early success in integrating Terminix, management now forecasts medium term organic growth of at least 5%, up from a previous 4% to 5%. 

Currency adjusted operating profit for 2022 climbed 23% to £542 million. Reported pre-tax profit fell 9% to £296 million given one-off and adjusting items, and interest related to the Terminix acquisition. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results. 

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 just over two-thirds, with North America accounting for half of overall group sales, followed by the combined Europe and Latin America at around a quarter. Bolt-on acquisitions remain a management focus, particularly in pest control, with 52 acquisitions excluding Terminix completed in 2022 for an aggregate cost of £259 million. 

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For investors, the highly uncertain economic outlook including rising interest rates should not be overlooked. Group net debt has risen despite remaining within management’s comfort levels, costs generally for businesses are elevated, while a forecast price/earnings (PE) ratio above the 10-year average suggests the shares are not obviously cheap.

On the upside, the early integration of its major Terminix acquisition is going well, with expected cost savings now increased. Scale for its pest control business is now considerable, the essential nature of pest control helps Rentokil make price rises stick, while it also continues to make smaller bolt-on acquisitions.

Consensus analyst estimate of fair value stand at just over 580p per share, implying further potential upside, while Rentokil is seen as a relatively safe port in a storm, enhancing its appeal in recent weeks.

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:

Buy