Share Watch: As long as pests persist, we’ll always need to call Rentokil

 



While we are rapidly running out of people who can claim to have been in London in 1925, if you were there and on good terms with someone in Stanley Baldwin’s Tory government, you could conceivably have been invited to the Palace of Westminster to witness an experiment that year on how to rid the building of the death watch beetle.

If you were really far-sighted, you might also have been able to buy shares in the company that was conducting this extermination programme, the company that we now know as Rentokil Initial. If you did, you would now be part of a group with revenues of £2.4bn (€2.8bn) and a current market value of £6bn.

However, you would have had to endure problems in the years in between, like the shock of seeing the founder of the company, Harold Maxwell-Lefroy, die later in 1925 when one of his chemical experiments produced fatal poisonous gases.

But Rentokil has become part of the culture – if pest control and getting rid of unwanted smells can be considered part of our culture.

Different climates throw up different pest-control problems, so the challenge for Rentokil has been to broaden its own specialist solutions. Interestingly, the pest-control business is still the growth engine of the group, which now operates in 70 countries and is a market leader in most of them.

The pest business last year was strong, up a fifth with revenues of £1.3bn and profits of £240m.

Its other business Initial, is a leading hygiene service business. It installs and maintains equipment like nappy bins, soap dispensers and paper towels for commercial, industrial and public buildings in 44 countries. Initial accounts for 20pc of group sales and operating profits.

Rentokil in the last few years has been on an acquisition spree focused primarily on pest control. It has spent almost £500m on 125 deals in 24 countries, mainly in growth and emerging markets like India, Indonesia, Brazil and China.

Last year, it acquired 41 companies spending £280m and this year it has set aside a £250m war chest.

Recently, it set up a joint venture with the German company Haniel, creating a work-wear and hygiene business in the Benelux countries, as well as Sweden and Central and Eastern Europe.

Rentokil’s most important market is the US, the world’s largest market for pest control, worth $8bn (€6.9bn).

The group is the third-largest pest-control company in the US, where it generates over 40pc of the group’s revenues and a third of its profits.

In the last five years, it has doubled revenues, driven by 50 acquisitions.

Given the fragmented nature of the US market and the financial strength of Rentokil, there is no reason that the group cannot continue to take market share.

In line with its pest-control acquisition strategy, the company has begun to implement a policy of hygiene bolt-ons.

Recently, it proposed a merger with Cannon Hygiene, a large UK specialist in hygiene services. Unfortunately for Rentokil, however, the merger has been provisionally turned down by the UK Competition Authority.

Last year, the group was one of the best-performing on the London Stock Exchange, as both revenue and profits showed healthy growth.

Revenue, at £2.4bn, was up 14.5pc and profits, at £350m, rose by a similar percentage. Interestingly, 90pc of its revenues are now derived from outside the UK.

The group is cash-generative, which helps acquisition activities, dividends and debt reduction. While its shares, which hover around £3.30, have done well in the past few years, investors have also rebelled at a proposed increase in directors’ payments.

In addition, the chairman, John McAdam, who is also chair of United Utilities, attracted attention for serving beyond the recommended nine years.

There is little to fault this company; trading is going to plan, while earnings are being helped by the strong dollar. But they are unlikely to accelerate next year and the shares, from the risk/reward viewpoint, appear to be balanced.

 

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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