Rentokil shares dive as North America disappoints

With bedbugs the talk of the town, you would imagine that the pest control industry is the main beneficiary. Rentokil Initial's (RTO) third quarter trading update was broadly positive, yet the group’s shares clicked into reverse in reaction to news that consumer demand in North America had softened. Group revenue through the quarter increased by 53 per cent to £1.38bn, although growth on a like-for-like basis was a more modest 4.3 per cent.

Management confirmed that “near-term market uncertainty means that the North American performance is anticipated to be marginally below our previous expectations”. Though the region registered an overall increase in organic revenue, the wholesale distribution business suffered a 2.5 per cent decline due to lower demand for chemical products for pest control. The group now expects the regional adjusted operating margin to be in the range of 18.5-19.0 per cent.

On a more positive note, the Terminix integration plan “has progressed well in the third quarter” with the cost synergy programme expected to meet full-year guidance of $60mn (£49.6mn) of pre-tax net synergies. And growth metrics across a range of locales, including Europe, Asia, and the UK, were wholly favourable.

Looking ahead, the group maintains that a sustained focus on managing inflationary pressures will enable it to meet its full-year guidance by achieving an adjusted operating margin of c.16.5 per cent, driven by an outsize contribution from the hygiene & wellbeing segment. M&A has been central to the re-scaling of the business and the group felt able to reiterate previous guidance that net debt would represent three times cash profits by the end of the year, aided by the cash-generative nature of the business.

Although North America generates roughly half of group sales, the double-digit markdown in the share price appears particularly severe given that full-year performance in the region will come in marginally below management’s previous expectations.