Rentokil’s ‘landmark’ acquisition puts it in pole position

Rentokil Initial (RTO) completed the acquisition of Terminix Global Holdings midway through October 2022. The integration process is still in train, but you get some idea of the scale change from the newly combined group’s full-year figures. In fact, Rentokil completed a total of 52 acquisitions in 2022 for an aggregate cost of £259mn and it anticipates nearly matching that spend through the current year. The scale benefits are reflected in increased cost-saving targets and the 45 basis point increase in the underlying trading margin, including a noticeable impact from the Terminix tie-up. Net pre-tax cost synergies from the Terminix deal amounted to $13mn (£10.7mn), well ahead of guidance, and management anticipates a further $60mn in 2023, leading to a total saving of $200mn by 2025.

It wasn’t all about the acquired assets. Organic revenue grew by 6.6 per cent while adjusted operating profit increased by 22.7 per cent, with broad-based organic revenue growth recorded across all its business categories. As foreshadowed, Covid-19 disinfection revenue reduced to £20mn from £117mn in the prior year, which accounted for the decline in reported revenue in the hygiene and wellbeing division. The core pest control division delivered an increase of 29 per cent in reported revenue (5.6 per cent organic), together with a similar increase in adjusted operating profit. The group adjusted operating margin is expected to increase by around 110 basis points to c16.5 per cent in 2023, reflecting further expansion in North America.

Adjusted cash flow of £490mn was £31mn up on the prior year, while a £9mn working capital inflow came about through a tighter focus on payables and receivables, although this was partially offset by higher levels of inventory in the year. Capital expenditure has returned to a more normal pattern of spending as Covid-19 impacts wane. UBS predicts EPS will rise to 20.5p next year, then to 23p in 2024.

We will be able to assess the full impact of the Terminix deal as the months pass, but management’s reference to a “landmark” acquisition is justified. It has placed Rentokil in pole position in the world’s biggest pest control market, while affording sizeable integrated cost savings. Rentokil is not overly exposed to any cyclical downturn in the global economy: rats and other unwanted invaders pay little heed to economic trends. It also benefits from high levels of recurring revenue from long-term contracts and can readily shift price increases through to its customers. A forward rating of 26 times forecast earnings may seem a bit punchy, but given the group’s ‘value’ fundamentals, we maintain that it’s still a suitable long-term buy-and-forget option for your portfolio. Buy.

Last IC view: Buy, 520p, 28 Jul 2022