Pest control company Rentokil (RTO) loses 8.4% to 265.2p despite releasing a decent set of results for 2017.
Its revenue is up 11.3% to £2.3bn, operating profit improves 25.8% to £282.4m and the company’s dividend per share is hiked 15.1% to 3.88p.
The company’s pre-tax profit more than tripled to £713.6m although this includes the proceeds of disposals of businesses transferred to the Haniel joint venture.
When this is stripped out, on an adjusted basis its pre-tax profit still improved by 14% to £286.9m. This was slightly ahead of market forecasts of £285m although overall 2017’s results are generally in line with consensus estimates.
However, embedded in the results release is a profit warning. The company says ‘If the recent exchange rates gains were to continue for the rest of 2018, the full year estimated negative impact of currency movements on our profit and free cash flow would be in the region of £10m to £15m’.
Rentokil is the world’s largest commercial pest control company and says North America is ‘particularly important to us as it is the world’s largest pest control market’. According to the company, it makes up for half of the global market worth around $8bn.
If the dollar continues to decline it could impact Rentokil badly, especially as the company is planning to generate $1.8bn of revenues from the US by 2020.
The company also holds net debt of £927.3m and faces higher interest rate costs, this is especially true of debt issued in US dollars as interest rates have risen.
CONTINUING ON THE ACQUISITION TRAIL
In 2017, Rentokil acquired 41 businesses and is planning to spend a further £200m to £250m on acquisitions for 2018. The company uses acquisitions to enter and consolidate markets. Through purchasing SAMES plus using a joint venture it now claims to be the market leader in Saudi Arabia and India.
The company’s acquisition budget ‘might prove conservative’ according to Simona Sarli, analyst at Bank of America Merrill Lynch.
She says that 2017’s initial spend budget was £150m but the company ended up spending £281m. Sarli adds that if Rentokil continue last year’s spending trend, new acquisitions might increase earnings by 6% for 2018.
Carolina de la Soujeole, analyst at investment bank Stifel, says ‘Rentokil is a highly cash generative business with a strong track record of recycling this cash into value-accretive M&A’.
Rentokil trades on 19.9-times 2018’s forecasted 13.3p of earnings using Stifel’s forecasts, paying a 1.6% dividend yield. Both Stifel and Bank of America give the company a ‘buy’ recommendation with a target price of 360p and 320p respectively. This implies upside potential of between 20.7% and 35.7%.
