Interactive Investor

ii view: Rentokil generates decade-high organic growth

Revenues rise again, but, following a 30% share price gain year-to-date, should investors be chasing?

17th October 2019 13:10

Keith Bowman from interactive investor

Revenues rise again, but, following a 30% share price gain year-to-date, should investors be chasing?

Third-quarter trading update

  • Currency adjusted total revenue up 9.6% to £727.2 million
  • Currency adjusted ongoing revenue up 9.8% to £723 million
  • Ongoing organic revenue up 5.5% and 4.3% from acquisitions

Chief executive Andy Ransom said:

"I am pleased with our Q3 results and our group organic growth of 5.5% is our highest level of quarterly organic growth in over a decade. Our performance in Q3, combined with further progress in our value-creating M&A programme, means we remain on track to meet expectations for the full year."

ii round-up:

The provider of pest control and hygiene services Rentokil Initial (LSE:RTO) reported its highest level of quarterly organic sales growth in over a decade in this third-quarter trading update. 

Organic growth from its ongoing businesses rose by 5.5%, while the acquisition of 15 companies during the period added a further 4.3% of revenue. 

Pest Control, which accounts for approximately three-fifths of total sales, enjoyed a 5.9% gain in organic growth. Emerging market sales grew by an impressive 12.7%. 

Organic revenue for its Hygiene business rose by 4.8%, driven by good growth in the UK, Europe and the Pacific. 

Rentokil's remaining Protect & Enhance business benefitted from growth in both its French workwear and UK property care businesses, with organic revenues up by 4.5%. 

The share price gained by over 2% in mid-morning UK stock market trading. 

ii view:

Growth via bolt-on acquisitions and the company's exposure to emerging markets both offer reasons for positivity. A focus on innovation and digital technology is also playing its part in driving growth for the pest control division. 

From an investor's prospective, a seven-year record of consecutive dividend increases is not to be ignored. Group strategy is also, for the time being, clearly aimed in the right direction. However, sat on a prospective dividend yield of just over 1% and with a current forward price/earnings (PE) ratio of over 30 and comfortably above the 10-year average, some caution is warranted. 

Positives: 

  • A strategy of bolt-on acquisitions
  • Diversity in both business type and geographical location

Negatives:

  • Weather can influence performance
  • US-listed peer ServiceMaster has bought Nomor, Europe's fourth-biggest pest-control company

The average rating of stock market analysts:

Strong hold

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