Rentokil transformed by major takeover

The performance of Rentokil Initial (RTO) has been turbocharged by the acquisition of US rival Terminix. Revenue is up by 70 per cent year-on-year at £2.67bn, while adjusted operating profit has shot up by 88 per cent to £437mn. 

The sheer size of the takeover – Rentokil spent $5.4bn (£4.3bn) on the pest control giant – makes it tricky to assess the strength of the underlying business. However, the signs are good. Organic revenue growth was strong at 5.4 per cent, reflecting “growth across all regions, and driven by resilient underlying demand and continued effective pricing”.

While the ‘hygiene and wellness’ division was impacted by a big slowdown in disinfectant sales versus the pandemic period, underlying pest control sales increased by 5.6 per cent. The smaller French workwear business has also bounced back, reporting organic sales growth of 16.3 per cent and a 34.1 per cent jump in operating profit.

Meanwhile, the group is “firmly on track to deliver synergies” of $60mn this year, and total annual pre-tax net cost synergies of at least $200mn by the end of 2025.

There were a couple of sticking points. Charlie Huggins, manager of the Quality Shares Portfolio at Wealth Club, noted that Rentokil's North America pest division was “lagging the rest of the group and weakened in the second quarter”. This was blamed on softness in residential and termite services, “but the exit of Terminix branches and other integration activities may also have contributed”, according to Huggins.

Borrowings are another thing to keep an eye on. Net debt currently sits at £3.27bn, resulting in a net debt to adjusted Ebitda ratio of 2.8x, which is expected to rise to 3x by year end. This huge debt pile means the group paid cash interest payments of £114mn in the first half of 2023 – £95mn more than in the previous year. 

Despite this heavy burden, the group is still splashing plenty of cash: it made 24 acquisitions in the period for a total consideration of £202mn, and intends to spend £300mn across the whole year – £50mn more than initially planned. 

Integrating multiple, large acquisitions is certainly not risk free, and debt will be a significant drag on cash flow. However, we are encouraged by the strength of Rentokil’s underlying business and the fact its cost saving plans are on track. With a forward price-to-earnings ratio of 25.9, it is also slightly cheaper than its five-year average. Buy. 

Last IC View: Buy, 538p, 16 Mar 2023