Rentokil restructuring continues

Rentokil Initial has been busy restructuring its internal divisions, making cost savings and reducing debt, which has helped boost adjusted pre-tax profits in the first half of the year by 39 per cent to £77m. However, the underlying picture shows that lack of top-line growth remains a challenge, with turnover in the period down 2.3 per cent to £1.23bn. And management admits that trading is tough, especially with significant pricing pressure squeezing margins in many categories.

Parcel delivery business City Link managed to cut losses from £7m to £4.7m, but revenues remained flat, while turnover in textiles and washroom services as well as in the landscaping business Ambius actually fell. Pest control provided some cheer with a gain in sales, but the geographical performance remains patchy. Trading in the Asia Pacific region was also weaker, with turnover down almost 7 per cent after the sale of the Electronic Security business and the exit from a low-margin Hong Kong government contract.

Net debt was reduced by £64m in the period although it still remains high at £1.04bn. Still, the group is generating decent cash flow, and with costs savings of £40m ahead of schedule the business remains on course to hit its full-year cost saving target of £75m. Shareholders though have seen the interim dividend passed again.

Bank of America Merrill Lynch says...

Buy. Rentokil's turnaround looks to be on track, and management outlook for the full-year is unchanged despite challenging trading conditions. The group is running a number of schemes to improve customer retention, sales productivity and new business, although the potential benefits are unlikely to come through until next year. However, net debt is down, and the target for the full-year is to bring this below £1bn and restore the group's BBB credit rating. Expect adjusted pre-tax profits of £205m and EPS of 8.6p (2009: £167m/6.86p).

Deutsche Bank says...

Buy. Turnover was down in the first half but the rate of decline showed a noticeable slowing in the second quarter compared with the first. Given the market concerns ahead of these figures, Rentokil's first-half performance offers some assurance. And while pricing pressures remain in some parts of the business, the group's success at cutting costs will help to generate profit growth, with £150m gross cost savings still looking achievable. With the shares in the 100-110p range, the company is priced 'ex-growth' which doesn't account for the cost-saving outperformance and a return to underlying growth. Expect adjusted pre-tax profits of £211m and EPS of 8.67p.