Rentokil drives sales even without Covid-19 filip

Shares in Rentokil Initial (RTO) have lost 8.7 per cent of their value since the start of the year. That’s worse than the FTSE 100 contraction and surprising when you consider the group’s defensive product and service lines. After all, if you wish to remove a family of rats from your house, the decision shouldn't fall under the heading of ‘discretionary spending’.

The pest control and hygiene services group has turned in a creditable performance at the half-year mark, although statutory comparisons with the 2021 half-year results are skewed due to the hefty short-term revenue stream for disinfection services in response to the pandemic. Those services generated £95.3mn in the first six months of 2021, against £13.6mn this time around. Once this is taken into consideration underlying trading is generally favourable.

Revenue growth (including disinfection) was evident across the group’s locales, except Germany which registered a 4 per cent decline. France, the Nordics and Latin America & Caribbean all registered double-digit sales growth. Take away the disinfection element and ongoing revenue was up 12 per cent at constant currencies to £1.56bn. Adjusted earnings were 7.8 per cent to the good at 9.49p per share.

The $6.7bn (£5.58bn) deal to acquire US extermination group Terminix has made significant progress on the approvals front, including the satisfaction of US anti-trust conditions, along with the divestiture of Terminix’s UK and Norway pest management businesses. The deal remains on track for completion at or around the end of the third quarter of 2022. The group continues to expand through M&A, initiating 31 acquisitions in 17 countries during through to the end of June. The M&A spree means that net debt is now equal to 2.2 times cash profits, against a multiple of 1.96 at the end of 2021.

Rentokil is priced at 26 times forward consensus earnings, which is in line with the broader sector, but the group’s 50-day moving average crossed below its 200-day moving average midway through February and the gap hasn’t closed, indicating the stock could be in downtrend. Nevertheless, we envisage significant scale benefits and synergies to accrue through the Terminix deal, so the technical signal is likely to reverse over the medium- to long-term. Buy.

Last IC view: Buy, 511p, 3 March 2022