ii view: Hospitality hit outweighs hygiene boost at Rentokil Initial

Closed businesses are impacting this pest control operator, but its hygiene services could benefit.

Covid-19 trading update

• Withdrawing previous guidance for 2020
• Suspending M&A programme
• Suspending dividend payments and withdrawing the 2019 final payment
• Cash funds available of over £650 million
• Cost reduction 2020 measures totalling £100 million

Chief executive Andy Ransom said:

"Rentokil Initial is a strong and resilient company offering critical and essential Pest Control and Hygiene services to customers.  While we had made a good start to the year, the ongoing uncertainty and turmoil presented by the Covid-19 outbreak will mean we will have a difficult second quarter and potentially beyond.  However, we are taking appropriate cost and cash action to protect the business and our liquidity, and to put us in the best position to support the recovery phase."

ii round-up:

Pest control and hygiene services provider Rentokil Initial (LSE:RTO) today posted an update on how it was battling Covid-19.

While trading up to mid-March was largely unaffected, with the exception of its Chinese operations, trading over the last 10 days had been more widely impacted. 

Rentokil, which has pest control operations in over 80 countries and hygiene services in 46, now expects a much more significant impact on its second quarter period and beyond. 

Reduced demand from customers in the hotel, restaurant, airline, schools and office sectors had been partially compensated for by food retailing and food production customers, and by demand for specialist hygiene services.   

As such, and given the degree of future uncertainty, management also withdrew previous 2020 profit guidance. In 2019, it reported an 11% jump in operating profit to £365 million. 

Rentokil shares fell by as much as 21% in early morning UK trading and are down over 30% year-to-date, virtually wiping out gains made over 2019. Fellow support services provider Capita (LSE:CPI) has seen its shares plunge over 70% in 2020. 

Measures announced to counter the virus hit include withdrawing the 2019 final dividend payment and suspending future dividends, cutting costs including staff pay cuts and temporarily halting its M&A or business acquisitions programme. 

Actions taken are expected to conserve over £500 million during 2020.

ii view:

Growth from bolt-on acquisitions and the company’s exposure to emerging markets have both offered reasons for positivity. A focus on innovation and digital technology is also expected to play its part in driving growth for the pest control division.

However, today’s update demonstrates that its customer profile, given a weighting towards many now closed hospitality businesses, is insufficient to completely see off Covid-19, despite exposure to now highly required hygiene services. The group’s enviable record of seven consecutive years of dividend increases is also to be forgotten. 

But the coronavirus offers opportunity for a global leader in pest control and hygiene. It will soon have an additional 2,500 trained technicians globally to undertake disinfection services. An ending of the corona crisis could see buoyant demand for hygiene and pest control clean-up services, although precisely how much is unclear. Today's decline suggests few investors are willing to stick around to find out.

Positives: 

• Exposure to hygiene services
• Diversity in both business type and geographical location

Negatives:

• The weather can influence performance
• US-listed peer ServiceMaster has acquired Nomor, Europe’s 4th biggest pest-control company

The average rating of stock market analysts:

Strong hold