Shares are up 8% to 355.1p after the company delivered growth in revenues, earnings and free cash flow above its internal targets.
As we explained previously, the combination of solid if unspectacular organic growth and contributions from small bolt-on acquisitions makes Rentokil one of the most reliable earners in the UK market.
READ MORE ABOUT RENTOKIL INITIAL HERE
Added to that, its two core businesses – pest control and hygiene – are almost entirely unaffected by political or economic upheaval as they are driven by the much bigger global trend towards greater urbanisation.
Ongoing revenues, excluding businesses disposed of during the year grew, by 13.2% thanks to organic growth of 3.7%, towards the top end of the group’s 3% to 4% target range, and a 9.5% contribution from acquisitions.
Ongoing operating profits grew by 13.3% with all regions contributing and a return to profitable growth in France.
DIRTY WORK BUT SOMEONE HAS TO DO IT
Pest control accounts for nearly two thirds of revenues and operating profits and generated a highly respectable 17.6% net operating margin last year.
Sales were up 12.6% with organic growth of 4.8%, which is more than double the underlying growth rate five years ago.
North America is a key market with revenues growing by an average of more than 21% per year over the last five years, and Latin America is now starting to make a meaningful contribution thanks to its high growth rates.
As well as rodent control Rentokil has moved into ‘vector control’ in North and South America to combat insect-borne diseases like dengue and it continues to spend on technology like apps to improve its service levels.
CLEANING UP IN A GLOBAL MARKET
Hygiene accounts for just under a quarter of Rentokil’s revenues and operating profits and like pest control is driven by the increasing number of people living in big cities.
Also like pest control, hygiene is a fragmented market with opportunities for Rentokil to deploy the significant cash flows it generates to snap up complementary businesses.
Revenues were up 26% last year and profits were up 20% helped by the acquisitions of Cannon in the UK and CWS in Italy the previous year.
Key to growing the business is building density at the city level by adding more services for existing customers so acquisitions are carefully targeted.
There are also opportunities to use tools like sensing technologies which were developed through pest control in creating new services in hygiene.
CRISIS, WHAT CRISIS?
With 90% of revenues generated outside the UK and minimal cross-border trading, Rentokil is likely to feel little direct impact from Brexit.
It has taken short-term measures to ensure access to supplies of stock and equipment in the UK and Europe but many of its country units are self-reliant.
Ongoing uncertainty over a final deal means continued currency volatility but as far as the actual businesses are concerned their defensive nature and their geographic spread means that any impact from a ‘bad Brexit’ will be mitigated.
On the subject of IFRS 16 and accounting for leases, the firm expects to see no material impact on either pre-tax profits or underlying net cash flows this year even though fixed assets and net debt will rise by c£200m which will mean higher interest and depreciation costs.
READ THIS ARTICLE TO LEARN MORE ABOUT THE IMPACT OF IFRS 16 ON QUOTED COMPANIES