ii view: Rentokil starts saving money on mega deal

Its core pest control business is a largely non-discretionary essential service. Buy, sell, or hold?

Third-quarter update to 30 September

• Total revenue up 18.9% to £901.3 million
• Organic revenue up 6.2%

Chief executive Andy Ransom said:

"This has been another good quarter for Rentokil Initial. Supported by the essential nature of our services and ability to offset cost inflation through pricing, we continue to deliver both good growth and profitability, while retaining high levels of customer and colleague retention.”

ii round-up:

Pest control and hygiene provider Rentokil Initial (LSE:RTO) today detailed sales broadly in line with City forecasts, with annualised cost savings from its $6.7 billion (£5.8 billion) takeover of US rival Terminix expected to be between $20 million and $25 million by year end. 

That’s around 15% of its previously forecast $150 million annualised costs savings and on track to achieve management's hoped-for 30% during its first year of completion. The purchase of Terminix more than doubles group headcount and adds significant new customer numbers to Rentokil’s base.

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Rentokil shares fell 3% in UK trading having gained 14% in October as the Terminix purchase completed. Coming into this latest update the shares were down by 7% year-to-date, broadly in line with the FTSE All Share index. 

Rentokil’s total sales for the quarter to the end of September, including Terminix, gained 18.9% year-over-year to £901.3 million. Sales excluding acquisitions rose 6.2%, aided by an ability to pass on rising costs through price increases, although sales growth was down from 6.5% in the second quarter and 8.1% in Q1. 

Acquisition adjusted sales for its core pest control business in North America rose by just 3.5% during the period, impacted by tough pandemic fuelled comparatives and hurricane Ian.  

Pest control has historically generated just under two-thirds of Rentokil sales, hygiene services a further fifth, and its protect and enhance or landscaping and property care business the balance.

Rentokil’s full-year results are scheduled for 16 March. 

ii view:

Founded in 1925 and headquartered in Crawley, Rentokil is today a FTSE 100 index constituent company with a stock market value of over £13 billion. Even prior to its takeover of Terminix, North America generated its biggest slug of sales at just over two-fifths, followed by the UK and Ireland and France at around a tenth each. It has purchased 43 smaller or bolt-on acquisitions in the year to date, most of them in pest control, bringing its bolt-on purchases to more than 200 businesses since 2016. 

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For investors, a highly uncertain economic outlook including rising interest rates could see some of its customers at least reduce some services or haggle harder over price. There's a risk that expected cost savings from Terminix might not be reached, while an estimated price/earnings (PE) ratio above the 10-year average suggests the shares are not obviously cheap. 

More favourably, its core business of pest control is arguably essential and not a luxury in areas like hospitality. Bolt-on acquisitions continue and cost savings from its the Terminix acquisition are now being made. 

On balance, and with the consensus analyst estimate of fair value standing at just over £6, reason for longer-term optimism appears to persist.   

Positives: 

• Diversity in both business type and geographical location
• Pest Control is a largely non-discretionary and essential service

Negatives:

• The weather can influence performance
• Currency movements can impact

The average rating of stock market analysts:

Buy