A growing middle class and increasing urbanisation in emerging economies are laying the foundations for steady growth at Rentokil Initial (RTO). At the start of 2014, the group initiated its 'right way' growth plan focused on its core pest control, hygiene and workwear operations as well as high-growth geographies. The group is already reaping the rewards of the new strategy, which aims to deliver consistent, high-single digit profit growth over the long term assisted by bolt-on acquisitions. We reckon Rentokil's improved focus and leaner business model will drive share price upside.
- Revised growth strategy
- Growing end markets
- High revenue visibility
- Falling debt
- Weakness in Europe
- 'Emerging quadrant' still small
Rentokil is in a good position to capitalise on the shift in demographics in emerging economies. Think tank the Brookings Institute estimates that by 2030 Asia will be home to 3bn middle-class people, a sixfold increase on 2009. In Latin America it expects numbers to grow by almost three-quarters to 313m during the same period. Meanwhile, the United Nations expects the proportion of the world's population living in urban areas to rise to 66 per cent by 2050, compared with just over half at the moment. At present Latin America, led by Brazil, is the world's most urbanised continent, with 80 per cent of the population living in cities. Urbanisation should drive demand for pest control as space and resources come under greater pressure, while closer proximity of buildings increases the chances of pest problems spreading.
Rentokil's recent acquisitions have focused on emerging markets most prone to such population changes. Last year the group did 30 deals, entering new markets such as Colombia and Chile, as well as expanding its footprint in existing markets. These businesses form part of the group's 'emerging quadrant', one of four segments drawn up as part of the 'right way strategy'. While this segment only accounts for a relatively small proportion of the group (7 per cent of sales and 6 per cent of profit), management is dedicating more resources to it, which looks sensible given its revenues grew by more than a fifth last year - far more than any other segment.
The group's remaining markets have been divided up into 'growth' (two-fifths of profit), 'protect and enhance' (almost half of profit) and 'manage for value' (6 per cent of profit). Admittedly, its 'protect and enhance' segment, which includes Ireland and France, put in a mixed performance last year with profit down 4 per cent. However, as part of its new strategy, management is focusing on improving customer service, pricing and productivity. This has already started to yield benefits with rising customer satisfaction levels in Benelux, the Nordics and South Africa. Management has also installed branch and route optimisation tools to enhance profitability and a customer profitability tool to improve price management.
The group's organic growth rate is starting to pick up, too. During the first quarter of the year it was up 2.5 per cent, compared with 2 per cent in the fourth quarter of 2014 and 1.2 per cent for the year as a whole. Three-quarters of business is done on a contract-recurring basis, which helps revenue visibility. On the acquisition front, management plans to spend £50m a year and broker Investec Securities reckons Rentokil has about £320m at its disposal. The group's sale of its Initial Facilities business certainly helped with this, and along with a £93m improvement in free cash flow last year to £129m, net debt was reduced by £260m, taking the net-debt-to-cash-profit ratio to a comfortable 1.9 times.
RENTOKIL INITIAL (RTO) | ||||
---|---|---|---|---|
ORD PRICE: | 153p | MARKET VALUE: | £2.8bn | |
TOUCH: | 153-154p | 12-MONTH HIGH: | 154p | LOW: 110p |
FORWARD DIVIDEND YIELD: | 2% | FORWARD PE RATIO: | 16 | |
NET ASSET VALUE: | 5p* | NET DEBT: | £775m |
Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
---|---|---|---|---|
2012 | 1.67 | 173 | 6.5 | 2.1 |
2013 | 1.79 | 180 | 7.2 | 2.3 |
2014 | 1.73 | 191 | 8.1 | 2.6 |
2015** | 1.77 | 205 | 8.6 | 2.8 |
2016** | 1.82 | 224 | 9.4 | 3.1 |
% change | +3 | +9 | +9 | +11 |
Normal market size: 15,000 Matched bargain trading Beta: 0.57 *Includes intangible assets of £431m, or 24p a share **Investec Securities forecasts, adjusted PTP and EPS figures |