Rentokil pushes on with its M&A strategy

Rentokil (RTO) is an innovative opportunist. Last year, its disinfectant business benefitted from the fear that Covid-19 could be caught from uncleaned surfaces. Its half year results show that demand had tapered back in Q2 as the scientific community decided that the virus was more of an airborne threat. The launch of its, almost too good to be true, air purifying unit VIRUSKILLER in the first half of this year is timely and could offset some of the disinfectant scaling back in the second half of the year.

Most of the growth in H1 came from its core pest control unit which increased revenue by 18.7 per cent, including 8.5 per cent organic growth. More revealingly, this represents 20 per cent revenue growth on a Covid-free H1 2019. Disruption from the pandemic stalled the unit's progress last year. This return to form is timely after its disinfectants business saw revenue slip from £75.7m in Q1 to £22.6m in Q2. A rapid bounce-back in the US meant that North America, which is its largest market contributing 46 per cent of revenue, was also its best performing, growing 29.8 per cent in the first half.

Despite some further Covid-19 disruption, it pressed on with its ambitious acquisition strategy, completing 24 deals in the year to date. This included 21 in pest control and two in hygiene, set across 13 countries. Cash spent on acquisitions in H1 was £261m and it expects this to rise to between £450m and £500m by the end of the year. This acquisitive strategy has been aided by very strong free cash flow performance. The group generated £222m, up 78.5 per cent, even though it increased its capital expenditure by 9.1 per cent.

The solid performance during the pandemic confirms the belief that Rentokil provides a critical service that is well insulated from wider economic shocks. On top of this, as discussed in these pages by Nilushi Karunaratne, pest control is underpinned by numerous structural growth drivers, including rising urbanisation, increasing workplace regulations, and climate change.

VIRUSKILLER may have generated only in £3.2m revenue in the first half of 2020, which isn’t game changing, but it is evidence of an innovative company that is happy to move quickly to spot opportunities.

The shares jumped 4 per cent on the results and are now 10 per cent in advance of where they were when we reviewed the investment case in April. A forward rating of 32 timesconsensus earnings would be too rich for some tastes, but it compares favourably with competitors Rollins and Terminix and we envisage accelerated growth opportunities in the key US market. Buy.

Last IC View: Buy, 500p, 08 Apr 2021