Rentokil shares look unstoppable

They've been in an upward trend since 2016, and buyers keep chasing Rentokil higher. Here's why.

Rentokil (LSE:RTO) Initial continues to confound those who believe the current 20-year high for its shares will be as good as it gets for the rat catcher and hygiene services giant.

The stock climbed another 2% to 374.4p today as more robust revenues from Rentokil in the first quarter of 2019 highlighted why it has been trading at more than 25 times its forecast 2019 earnings per share.

The valuation, which compares with a five-year average of 21.7x, has been sustained by its performance in pest control relative to Rentokil's more highly-rated US peers.

Rentokil is the first of the major players to report Q1 figures, with today's 5% rise in organic revenues in pest control slightly lower than the 5.5% recorded in Q4 and below the 6% forecast by analysts at Jefferies.

The performance has been driven by a 12.1% uplift for its growth division including North America and Europe, with emerging markets ahead 11.5%.

Hygiene also made a strong start to the year, with organic revenues growth of 4.3% coming in much higher than the 1.8% rise seen a year earlier. Overall, CEO Andy Ransom said the company had made a strong start to 2019 and was on track to meet market expectations.

Despite the optimism, Jefferies said it could see few catalysts for re-rating the shares. The broker's 'hold' recommendation and price target of 345p also reflects limited room for near-term margin progression in pest control.

Source: TradingView   Past performance is not a guide to future performance

Rentokil acquired 112 pest control businesses for its growth division between 2014 and 2018, including 56 in North America where it currently has more than 300 branches, 45 distribution centres and over 8,000 staff.

At last year's Capital Markets Day, Rentokil set out plans to create a business in North America with revenues of about US$1.5 billion and margins of around 18% by the end of 2020. It needs compound annual growth in revenues of about 10% to achieve its target.

One area of potential growth may come from addressing the public health threat posed by vector-borne diseases such as malaria, yellow fever or the Zika virus.

Its November 2017 acquisition of North America's largest provider of mosquito control services bolstered its position in this market, which is expected to see increased demand due to factors such as climate change and greater travel.

Under the leadership of Ransom, who took over in 2013, shares in Rentokil have been moving in the right direction. They were trading at 95p in April 2013 after sinking to a record low in 2008.

Almost 90% of the company's revenues come from outside the UK, with Rentokil claiming to be the leading pest control company in 50 markets.