Shares in pest control and hygiene group Rentokil Initial (RTO) jumped as much as 7% to 563p after the firm posted a sharp increase in first half sales and earnings and raised its full year profit forecast.
For the six months to June, revenues rose 18.3% on a constant currency basis to £1.46 billion driven by strong demand for its core pest control and hygiene services, as one-off revenues from disinfection tailed off in the second quarter.
TWIN GROWTH ENGINES
Thanks to its strong underlying trading performance, operating profits climbed more than 55% to £208.4 million while free cash flow was £220 million or 150% of pre-tax profits with no major bad debts or insolvencies among the firm’s customer base.
On top of the firm’s steady organic growth of nearly 12% in the first half, Rentokil hit the acquisition trail again this year with no fewer than 24 deals completed, 21 of them in pest control, for £261 million. Full year spending on M&A is now expected to be between £450 million and £500 million.
‘We delivered a strong performance, slightly ahead of our expectations, and given the momentum in the business and agility demonstrated through the pandemic to date, we are confident of making continued progress in the balance of the year,’ said chief executive Andy Ransom.
‘Assuming trading conditions around the world continue to improve and are not significantly impacted by rising cases of new Covid-19 variants, we anticipate mid-single digit organic growth in our core businesses for 2021 and, despite the anticipated tapering off in disinfection presenting more challenging comparatives in the second half, we expect market consensus for full year adjusted pre-tax profit to increase by around £10 million to £15 million,’ added Ransom.
The results confounded the sceptics, including analysts at Berenberg who put a sell recommendation on the stock in February based on fears the firm would lose market share in the US.
In contrast, revenues in North America rose almost 30% in the first half to £694 million or close to 50% of total group turnover.
Analysts at Davy believe the shares still have ‘material upside’ despite their strong recent performance. ‘The stock is up 12% in the last two months and trades at 28-times 2022 earnings, falling to 25-times in 2023. While these valuations never look optically good value, they remain on significant discounts to US peers (Rollins trades at circa 50-times).
‘In our opinion, Rentokil has the best geographic profile of all the pest companies, while the hygiene operations may prove a significant driver in a post-pandemic world.’
READ MORE ABOUT RENTOKIL HERE