Interactive Investor

ii view: Rentokil – pest control up, disinfection down

22nd April 2021 11:46

Keith Bowman from interactive investor

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Pest control should hopefully build as businesses reopen from the pandemic. Buy, sell or hold?

First-quarter trading update to 31 March

Chief executive Andy Ransom said:

"I am very pleased with the performance our colleagues delivered in Q1, in particular the growth momentum achieved by our Pest Control business, and we remain confident in delivering further operational and financial progress in 2021."

ii round-up:

Pest control and hygiene provider Rentokil Initial (LSE:RTO) today stressed the uncertain outlook for the business given the many unknowns and regional variations in relation to the global Covid-19 pandemic. 

A falling off in disinfection demand within its hygiene business continues to be expected, as does a building in sales momentum for its pest control business as more businesses, such as hospitality, potentially find themselves freed from virus closures and restrictions. 

Rentokil shares fell by more than 2% in early UK trading, leaving them up around 40% since pandemic induced lows back in late March last year, broadly in line with the wider FTSE 100 index. 

Ongoing revenue for the period rose by 15.3% to £711 million, aided by a return to organic growth of 1.2% for its pest control business. Sales for hygiene grew by 48% compared to the first quarter of 2020 and included a £76 million one-time contribution from disinfection. However, and as expected, this was down from a £100 million one-off contribution in the final quarter of 2020.

For its North American business, where vaccine rollouts have made good progress, a very strong performance during the quarter was reported, with sales up by nearly 40%. Less favourably, the recent reintroduction of lockdowns in parts of Europe, such as France, is expected to result in the recovery of its European markets being several weeks behind the recovery now anticipated in the UK and elsewhere. 

Rentokil made seven new bolt-on acquisitions during the first quarter, adding to the 23 businesses acquired over the full year to the end of December. A targeted spend of £400 million over 2021 is in management’s sights. 

First-half results are currently scheduled for 29 July. 

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 property management or protect and enhance making up the balance. On a geographical basis, North America is its biggest market, accounting for around 43% of sales. Europe comes next at around a quarter, followed by the UK and the rest of the world at approximately 16% and Asia and the Pacific the balance.  

For investors, the 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 payment was previously 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 some caution appears sensible, long term momentum looks to be 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

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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