- Rentokil shares have lagged
- Nelson Peltz a top-10 investor
- Firm can’t grow its earnings
Pest control and hygiene firm Rentokil (RTO) has been one of the worst-performing stocks in the FTSE 100 this year, so it is no great surprise talk is circulating of an activist investor taking an interest in the business.
Shares in the group jumped as much as 68p or 15% to 482p shortly after the open and were still trading up nearly 50p or 12% by mid-morning.
LAGGING BEHIND
Rentokil has been struggling to improve its performance in the key US market, which makes up the bulk of its revenue.
After reporting a strong full-year performance, boosting the shares in March, the firm’s first-quarter trading update in April did little to encourage sentiment.
The business is seen falling further behind its US peer Rollins (ROL:NYSE), despite the 2022 acquisition of rival Terminix for an EV (enterprise value) of £4.5 billion, a deal which has so far failed to deliver the profit uplift investors were expecting.
Now, according to Bloomberg, activist investor Nelson Peltz has amassed a ‘significant’ stake in the company and has ‘reached out to discuss ideas and initiatives to improve shareholder value’.
Without revealing the size of its stake, Peltz’s firm Trian Investors said it was a top 10 shareholder in Rentokil, although there has been no notification to the London Stock Exchange.
The largest shareholders in Rentokil as it stands are UK investors Threadneedle, Schroders (SDR), Axa and Royal London, along with US institutions Capital, Fidelity, T. Rowe Price and Vanguard.
One outlier on the list is Citigroup’s London global markets business which holds a 3.75% stake worth £450 million at today’s price, most likely for an outside investor such as Peltz rather than for its own account.
WHAT CAN PELTZ DO?
The news an activist is targeting a company means the business is underperforming to begin with, but with a group as big as Rentokil there would seem to be few easy fixes.
Although total revenue has doubled in the last five years from £2.7 billion to £5.4 billion, thanks to the pandemic and the Terminix deal, reported earnings per share were lower last year than they were in 2019.
In contrast, US firm Rollins increased its turnover from $2 billion to $3 billion in the same period and more than doubled its earnings from $0.41 to $0.89 per share.
Looking back over more than 20 years, Rollins has compounded earnings at more than 13% per year with very little volatility, whereas Rentokil has barely grown its earnings at all over the same period, so the issues at the UK firm aren’t going to be solved overnight.
