Rentokil sights North American market

Rentokil Initial (RTO) proved its defensive characteristics once again as stable growth in pest control sales and a strategic move to conquer the North American market prompted an 18 per cent dividend hike to 6.4p per share.

Defensive names are undergoing something of a renaissance, as price inflation and geopolitical concerns have investors yearning for safe havens. Pest control products fit the bill, as they are essentials that consumers are unlikely to stop buying even in leaner times.

Although sales of Rentokil’s disinfectants have nearly halved from their pandemic-fuelled peak in 2020, its pest control division stormed ahead with 18.6 per cent growth, and sales of £2bn in the year to the end of December. 

Working from home delivered higher numbers of residential customers in the US, prompting organic growth of 8.1 per cent. Structural demand drivers including rising urbanisation and climate change pave the way for the pest control market to continue growing at a rate of around 5 per cent a year, needed to offset the ongoing decline of disinfection revenues, which are expected to fall from £117.8mn to between £10mn-£20mn in 2022..

Prospects for this switch are looking good as Rentokil has invested heavily in its pest control services. Its tech offering, Pest Connect, which uses infrared beams to sense rodent activity, activate traps and update technicians in real time, saw a 58 per cent increase in installed devices to 235,000 units in 2021.

Meanwhile, a well-timed spree of 52 bolt-on acquisitions for a total consideration of £495mn in 2021 moved Rentokil closer to its strategic goal of becoming the “number one player in North America”, which was its best-performing region in 2021. 

The company plans to halve the acquisition spend in 2022, excluding its planned takeover of US rival Terminix. This announcement in December has dragged on Rentokil’s shares, but is expected to complete in the second half of the year after a complex regulatory approval process, and generate pre-tax synergies of at least $150mn by 2025.

“Continued potential upside to numbers from the underlying business and from TMX synergies” makes Rentokil “look good value versus other defensive growth names”, said RBC Capital Markets, noting the stock as one of its preferred defensive names.

Although Rentokil’s forward PE ratio of 27.1 makes it rather expensive, the company’s interesting mix of defensive characteristics and growth prospects go some way to justifying this. Buy.

Last IC View: Buy, 549p, 29 July 2021.