Shares in pest control and hygiene group Rentokil (RTO), which had been among the best performers in the FTSE 100 since the coronavirus crisis began, shed 16% to 311p after the firm cancelled its dividend and withdrew its financial guidance.
At the time of its preliminary results in February, the main impact on its business was in China where around half of its customers were affected by the shutdown. Offsetting this, strong demand for hand hygiene services meant the firm still expected a decent performance in the first quarter.
However, in the last two weeks the outbreak has ‘escalated rapidly impacting businesses around the globe in an unprecedented manner.’ As a result, the firm says, ‘it is impossible to predict with any degree of certainty the impact this will have, however we do now expect a much more significant impact on our operations and performance in Q2 and beyond.’
NO GUIDANCE
Given the ‘unprecedented uncertainty’ over the potential impact on trading, Rentokil has withdrawn its financial guidance for the current year. It intends to issue a trading update on 16 April and may issue revised guidance then.
On a positive note, trading in China has improved and it is now able to service around three quarters of its customers.
However, lockdowns in Italy - where it has cut service levels by 40% - and other key countries mean that the impact on its global business ‘has significantly increased.’
The worst-affected businesses are in the hotel, restaurant and catering (HORECA), the airline industry and schools and offices. On the other hand demand for hygiene services has increased markedly in sectors like food production, food retail and healthcare.
NO DIVIDEND
The majority of Rentokil’s costs are fixed with employment costs eating up 45% of revenues. Its main variable costs are fuel and materials used in servicing its customers.
In order to cut costs and optimise its cash position, the firm has halted its acquisition programme - one of the drivers of top-line growth - and has cancelled the final dividend of 3.64p per share which it proposed last month.
These two moves will save around £300m in cash, while cutting capital spending will save another £75m against its original budget for this year.
In addition the firm has cut management pay levels and cancelled the bonus scheme, frozen hiring and cut back on overtime, reduced its marketing spend and stopped all travel, entertainment, meetings and external training. These measures are expected to save another £100m in costs.
