Stockwatch: ‘unpopular big blue-chip’ looks to offer value

Can the new CEO of five months at FTSE 100 Rentokil Initial (LSE:RTO) tip its story towards robust performance and away from provisions and restructuring that, for example, characterised the 30 July interims? These saw a 24% drop to 335p from which the price has recovered 4% to 347p.

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I confess being part-attracted to examine Rentokil given that its chart is a rare example over the last three months of not actually being a bullish “bowl” or outright spike. 

The contrarian inside me feels more interested exploring whether a decline is altogether rational, especially if accompanied by short selling. Rentokil’s aggregate net short position was 4.32% as of 11 August but the modern sagacity of the Financial Conduct Authority (FCA) on disclosure has made it impossible to reckon any trend beyond a spreadsheet.

Over the long run, Rentokil’s share performance does in part reflect its pitch to be “a scale operator with leading positions internationally”, with pest control, hygiene and well-being services offering defensive growth and, in principle, quality earnings from stable, recurring subscription contracts that constitute 70% of group revenue. Operating margins are respectably high single-digit per cent if not double-digit.

Indeed, in the 1980s and 1990s the then CEO and chair, Sir Clive Thompson, was nicknamed “Mr 20%” for delivering an unprecedented, consistent streak of 20% growth in earnings per share (EPS) over roughly two decades. This broke down, however, in the late 1990s as market conditions shifted.

Yet from 60p in late 2011, the shares had another terrific run over 600p in 2021 and 2023 before de-rating to 330p by March 2025. 

Rentokil then embarked on another rally close to 500p by last March, but this failed to hold and with the 30 July interims there was a stinger by way of management withdrawing its long-term 20% North American margin target to prioritise revenue growth amid signs of weakening demand for residential services.

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

I still essentially ask: does Rentokil offer good substance for a new CEO to improve earnings quality by way of classic turnaround initiatives? 

The six-year table shows a quite bumpy record although the consensus of analysts does curiously anticipate a 65% bounce in normalised EPS this year, then a consolidation to around 10% growth in 2027. 

At 347p a share in the market, this implies a sterling-equivalent price/earnings (PE) of 16.2x based on 21.4p EPS, easing to 14.7x if 23.6p is achieved in 2027. However, this is liable to adjust away some exceptional charges, so could be seen as fair.

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The prospective yield is around 3% rising to 3.2%, admittedly nothing special given earnings cover would be around twice.

That the market appears to disagree with a “buy” consensus targeting 455p to 475p could reflect analysts having been bullish before the recent drop, in which case it becomes tricky not to double down on one’s stance.

Yet I would not dismiss scope for a new CEO to have a far-reaching effect and believe Rentokil is at least at an interesting juncture, worth following.

Rentokil Initial - financial summary
Year-end 31 Dec

Source: company accounts.

Classic turnaround initiatives, especially in the US

North America accounts for around 59% of group revenue and 55% to 58% of its adjusted operating profit, while the group also reports in US dollars. Rentokil is one of the leading players there in pest control and the world’s largest operator overall, hence it is important to be seen to be getting the US market right.

The story, however, continues to be mixed. It was disrupted by the $6.7 billion (£5 billion) acquisition of Terminix, a major US and global operator, meant to strengthen the group’s global power and achieve $325 million synergies by this year. Instead, and underlining risks with big takeovers, the integration led to trouble such as friction between branches, over-hiring and customer dissatisfaction. It significantly explains why the new CEO’s pitch involves “putting customers first, delivering sales and operational excellence and simplifying the business”.

Rentokil has not, however, made any write-downs within the circa £4.2 billion equivalent paid for Terminix, relative to a current group market value near £8.8 billion. Instead, the company has continuously reported exceptional costs in relation to the acquisition, while also encountering slower organic growth and margin pressures in the US. This helps explain the quite annoying gap between reported and normalised EPS in the above table.

First-half 2026 results alone saw North American transformation costs of $38 million, softened with the assurance of $45 million cumulative gross savings and net savings after investment of $28 million. The International side (basically, everywhere else) has required $9 million similar costs.

Group simplification into two essential geographic divisions

A new “group chief transformation officer” has been appointed from 7 September after 20 years at the consultancy McKinsey where he led the UK and Ireland operations. An internal candidate has been appointed the new CEO of International and the new group CEO Mike Duffy is also heading North America.

Duffy, an American citizen, was previously CEO of OnTrac, a US logistics company specialising in residential last-mile deliveries for e-commerce and direct-to-consumer brands. I am inclined to respect his sense of how Rentokil has “strong foundations in place to drive operational excellence, improv[ing] financial performance and incremental value for shareholders”.

He emphases a customer focus, standardisation of the group branch operating model for sales and operational excellence, a simpler set-up, and keener cost base. “We have started to progress these priorities with a focus on North America...a strengthened leadership team, regional head office and training centre established, and a standardised operating model to segment commercial and residential services”, he says – all to be self-funded through cost savings.

That would appear to limit any damage from ongoing exceptional charges.

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North America saw first-half organic revenue growth of 3.7%, softening slightly to 3.6% in the second quarter after 3.9% in the first. The operating margin improved to 9.7% from 9.0% in the first half of 2025. International saw 3.5% organic revenue growth that improved to 4.2% after 2.7% in the first, with a remarkably high (if adjusted) margin of 19.1%, down 0.1% like-for-like. It comes across as sound, if unexciting, but where fresh actions could re-rate performance.

The near-term glitch is “some second-quarter weakness in North American residential lead flow”, although for now management has affirmed full-year expectations. The risk is these still feeling somewhat exposed if 2026 normalised EPS really is to jump 65%.

Still, the interim dividend rose 8% with 3.0x cover in terms of reported EPS, hence the payout policy backs management’s words.

Another concern is net financial gearing around 56% with the interim net interest charge taking 26% of operating profit - a potential constraint should the Middle East situation worsen and lead to higher inflation and interest rates this autumn onwards.

Consistent pattern of director share buying as price has recently fallen

Notably, on 31 July, out [of] the closed period in relation to interims: the chair bought £367,000 worth at 345p equivalent (trades in the US), the CEO £185,000 worth at 352p and a non-executive director £35,600 worth at 356p. This is meaningful, concerted buying the market would normally respond to but sentiment is weak – with the shares at 347p.

Moreover, on 9 March the new CEO bought £366,000 worth at 458p, and lest we fret that this might have been related to some requirement of employment, or to get an options package, another non-executive director [bought] £74,000 worth at 458p also, a 32% premium to the current market price.

Later that month, a fifth director bought £9,500 worth at 357p and the retiring chair £72,000 worth at 417p.

Implicitly, the board believes this leg down in price – especially post-interims – merits seizing.

My conclusion is weak sentiment justifying a starter position given Rentokil’s challenges should be broadly rectifiable, even its notorious “cumulative termite damage claims provision” of $392 million, which included an extra $47 million in the first half of 2026.

There might not be another spectacular 10-year bull run like from 2011, but Rentokil intrigues as “the big unpopular company” able to prove a useful contrarian investment. Such was a classic iteration of Benjamin Graham, the 20th-century dean of value.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.