Pest control firm Rentokil’s (RTO) acquisition strategy has sparked a 10% jump in revenue in its first quarter, but fails to impress the market as the stock  nudges 1.3% lower to 244p.

Investors may be concerned that organic growth is lagging  as 6.9% of revenue came from takeovers.

This is more than double the 3.1% of organic revenue growth over the same period and may prompt doubts about how much the firm can grow without buying more businesses.

Its pest control division has performed particularly well as revenue has increased by 19.1%, with organic sales accounting for approximately a quarter of its growth.

Rentokil graph

 

In the year to date, Rentokil has acquired 12 businesses, with 10 in pest control and one in its property care and hygiene divisions, respectively.

Overall the annualised revenues of the new businesses amounted to £101.7m in the year prior to the acquisitions.

Broker RBC Europe analyst Andrew Brooke has an ‘outperform’ rating on the stock, noting as its valuation is in line with other defensive growth names in the sector, with the exception of its US peers.

The analyst is not worried about slower growth compared to the fourth quarter as it performed strongly in US pest products and it faced tough comparatives against the first quarter of 2016.

He comments: ‘Rentokil is one of the few stocks that should continue to show positive growth, margin and return on invested capital momentum with a compelling M&A story that should continue to drive earnings per share.’

Management has confirmed it expects to perform in line with expectations for 2017.


Issue Date: 19 Apr 2017