- Third-quarter trading muted
- Full-year margin seen down
- Pre-tax profit target maintained
Looking through the third-quarter update from pest control and hygiene group Rentokil Initial (RTO) there was little to write home about, but the lack of further downgrades combined with the fact the stock price was at multi-year lows probably explains today’s positive market reaction.
The shares opened up 34p or almost 10% at 375p before settling at 368p for a gain of around 8%, making them the best performer in the FTSE 100 index.
SNAIL’S PACE
For the three months to September, group revenue rose 3.6% with organic growth of 2.6% due to strength in Europe, the UK and Asia, while North American organic growth was just about positive at 1.4% for the period.
That compares with group revenue up 2.8% on a like-for-like basis and North American revenue up 1.1% on a like-for-like basis in the first half, so not a great deal of difference.
The firm said ‘actions’ had been taken to bolster its effort to increase organic growth in North America and rebalance the cost base since its last trading update in December, but at the same time synergy benefits from the Terminix deal which were promised this year would be delayed until 2025 as it undertakes a review of ‘elements of the programme’.
Customer retention in North America has increased slightly, but still only sits at around 80%, while the volume of new leads picked up ‘markedly’ in September after weak flows in July and August but fewer sales were closed and the average dollar value of those leads was lower, not exactly a resounding success.
The company talks about having a ‘high performance culture’, increasing its focus on speeding up response times, selling the ‘basics’, improving lead conversion and customer engagement, but these are all fairly fundamental to any business.
LOWER MARGIN BUT PROFIT FORECAST HELD
In terms of operating margins, with lower volumes than planned and elevated workforce, material and consumable costs, plus an impact from the new ordering process at Terminix and higher inventories, Rentokil expects the full-year outturn to be 15.5% compared with 16.5% in the first half, which implies a 200 basis point or 2% drop in the second half.
Despite this, guidance for full-year profit before tax and amortisation was maintained at around £700 million against last year’s £766 million after it was cut at the last trading update in September.
Chief executive Andy Ransom remains upbeat about the firm’s prospects once it gets through the Terminix deal: ‘In the New Year, we will review the early results of new Q4 integration activities, including the piloting of new satellite branches, and new technician and sales pay plans, in addition to assessing the effectiveness of our expanded growth initiatives. Post integration, we remain strongly optimistic that our business will lead a highly resilient, growing market.’
