- Marketing efforts in North America improving
- Positive news on pricing and cost pass-through
Shareholders in Rentokil Initial (RTO) might be still a little punch-drunk after October’s share price slump, which followed a trading update detailing revenue and margin pressure in North America. Six months on, and the pest control and hygiene group reports that “growth performance has stabilised” in that corner of the world, with organic growth up by 1.5 per cent in the first quarter to the end of January. Management cites the positive impact of its curiously titled 'RIGHT WAY 2' plan, which has been designed to boost sales conversion and optimise the group’s marketing functions across the Atlantic.
All this relates to the integration of its marquee acquisition of Terminix, a deal that was completed in October 2022. In a subsequent review of the buyout, Phil Oakley cast doubt on whether Rentokil had paid a fair price, suggesting that the group “has definitely got its work cut out to make this deal pay off by earning acceptable returns for its shareholders”. He may have had a point based on the takeover premium, but the kicker for the deal was the prospect of dominance in the North American market and the growth prospects on offer.
The integration of the administrative functions of North American businesses is now complete, enabling “shared use of resources and the harmonisation of operating standards and pay plans”. The full impact will only become apparent over time, as the first full branch-level integrations are expected midway through the year, but chief executive Andy Ransom reiterated “guidance of 2 to 4 per cent organic revenue growth in the region”.
The raw numbers in Q1 only tell us so much. Revenue was 4.9 per cent to the good on constant currencies to £1.29bn, of which 3.1 per cent was generated organically. There was positive news on pricing, which is pleasing given that margin progression is dependent on the efficient pass-through of cost inflation to customers.
Rentokil’s M&A programme shows few signs of flagging. On that score, the group’s increased presence in the Indian market through the acquisition of HiCare Services could prove significant over the long run.
Last IC view: Hold, 493p, 13 Mar 2024
