ii view: reliable Rentokil repays investor faith

It's busy buying up other businesses and pest control sales have risen as economies reopen. Buy, sell or hold? 

Third-quarter update to 30 September

• Ongoing revenue up 0.9% to £761 million
• Ongoing revenue excluding disinfection up 10.2% to £750 million

Chief executive Andy Ransom said:

"We have delivered a strong performance from our core businesses in the quarter and are confident of sustaining this momentum for the remainder of the year. Assuming no further significant deterioration in trading conditions arising from the pandemic, our performance in Q3 - combined with further progress in our value-creating M&A programme - means we remain on track to deliver a full year performance in line with the guidance given at our interim results in July."  

ii round-up:

Pest control and hygiene provider Rentokil Initial (LSE:RTO) today reported a 0.9% rise in ongoing revenue as gains in pest control more than offset an expected fall in demand for disinfection. 

Pest control sales grew by nearly a fifth, despite pandemic lockdowns in parts of Asia, as businesses such as hospitality were open compared with last year when they weren't. Bolt-on acquisitions continued, too.  

Rentokil shares fell by more than 2% in UK trading, having gained over 60% since pandemic induced market lows back in March 2020. That compares to gains of around 44% and 75% for the broader FTSE 100 and FTSE 250 indexes. 

Ongoing sales for its hygiene business when excluding the disinfection unit, grew by 6.4%, aided by good performances in the UK, Europe and Latin America.  

Sales for disinfection services fell to £11.4 million from £22.6 million in the a second quarter. Management continues to expect second-half sales of between £10 million and £20 million. Revenue for its protect and enhance business, encompassing its workwear and UK property care units, rose by 6.2%. 

Nine bolt-on acquisitions were made in the quarter, most in relation to pest control. Expected full-year expenditure on M&A remains between £450 million to £500 million. Full-year results are scheduled for 3 March. 

ii view:

Rentokil operates in over 80 countries. Pest control generates the majority of sales at around three-fifths, with hygiene a further quarter and its protect and enhance business making up the balance. On a geographical basis, North America is its biggest market, accounting for around 43% of sales. In Europe, both the UK and France account for around a tenth of sales each, with Asia Pacific contributing around 15%. 

For investors, continued uncertainty of the pandemic cannot be ignored. An estimated price/earnings ratio above the three- and 10-year averages also suggests the shares are not obviously cheap. But the dividend is being paid again, bolt-on acquisitions are being made and some added emphasis on hygiene could now be seen following on from the pandemic. In all, while some caution is sensible, long-term momentum appears to remain in Rentokil’s favour.   

Positives: 

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

Negatives:

• The weather can influence performance
• Foreign exchange headwinds

The average rating of stock market analysts:

Buy