ii view: disinfection services aid Rentokil

The pandemic has proved mixed for this pest control and hygiene company. We assess prospects.

Full-year results to 31 December 2020

• Revenue up 5% to £2.81 billion
• Adjusted profit up 4% to £355 million
• Final dividend payment of 5.41p per share

Chief executive Andy Ransom said:

"In an extraordinary year, we have demonstrated the inherent strength of our business, growing revenue, profit and cash. Notwithstanding the impact from business closures in lockdown, Pest Control continues to exhibit good structural growth drivers. The medium-term prospects for our Hygiene business have never looked more promising as the demand for global hygiene services is sustained post the pandemic.

"2021 will be a year of transition as we cross the bridge from the worst of the crisis in 2020 to, hopefully, a post-pandemic 2022.  Thanks to the significant and swift actions we took in 2020, we are strongly positioned for the coming year, and expect to see further progress from our core Pest Control, Hygiene and Protect & Enhance categories."  

ii round-up:

Rentokil Initial (LSE:RTO) today reported a more than one-third increase in sales for its hygiene business as demand for disinfection services under the pandemic helped push adjusted 2020 profit higher. 

The dividend was resumed with a 5.41p per share final payment, as profit adjusted for a 2019 disposal rose by 4% to £355 million. 

Rentokil shares retreated marginally in UK trading, having risen by around a third since pandemic-induced lows back in late March last year. This is broadly in line with the FTSE 100 index. 

Sales for its largest pest control business proved mixed, rising by just 1%.  Reduced demand from customers in the hotel, restaurant, airline, schools and office sectors had been countered by services to food retailing and production, pharmaceutical, transport and residential customers. 

Disinfection-related revenues within hygiene jumped from £49 million in the first half to £176 million in the second half. Washroom services within hygiene had suffered given lockdown impacts on customers such as hotels and restaurants. Excluding disinfection, ongoing revenue declined by 4.6%. But by the year end, access to only 4% of its hygiene customer’s premises was still suspended, against 22% back in April.  

Rentokil acquired 23 businesses in over the year - 21 in pest control, particularly in its key North America market, one in hygiene and one in its smaller protect and enhance division. 

Accompanying management outlook comments pointed to further operational and financial progress in 2021. Disinfection services will remain as part of its crisis response, although it expects volumes and prices to significantly unwind as the year progresses and the crisis hopefully abates.  

ii view:

Founded over 100 years ago, today Rentokil operates in over 80 countries. Pest control generates the majority of sales at around three-fifths, with hygiene a further quarter and its property management or 'protect and enhance' making up the balance.

On a geographical basis, North America is its biggest market, accounting for around 44% of sales. Europe comes next at just over a quarter, followed by the UK and the rest of the world at 16% and Asia and the Pacific region the balance.  

For investors, the uncertainty of the pandemic cannot be overlooked, while an estimated price earnings ratio above the three-and 10-year averages suggests the shares are not bargain basement cheap. That said, the dividend payment has been restarted, bolt-on acquisitions continue to be made and some hygiene follow-through from the pandemic could be seen over coming years. In all, while market dips may provide better buying opportunities, long-term momentum appears to remain in the company’s favour.   

Positives: 

• Diversity in both business type and geographical location
• Dividend restarted

Negatives:

• The weather can influence performance
• Foreign exchange headwinds

The average rating of stock market analysts:

'Buy'