Rentokil says American slowdown will hit profits

A slowdown in its key North American market is set to hit profits at Rentokil Initial, with the warning from the world’s largest pest control company wiping nearly a quarter off its share price.
Rentokil said it expected to make an adjusted pre-tax profit of about £700 million this year, lower than the £780 million that City analysts had forecast, because of weaker sales in July and August. It also forecast an adjusted profit margin of about 15.5 per cent, a downgrade from predictions in July for margins to be “marginally ahead” of the 16.6 per cent recorded last year.
The drop-off in demand was exacerbated by an increase in hiring of sales staff and technicians before an anticipated increase in activity during the peak summer season. This had left the business “over-resourced”, with an expected hit to profits of about £50 million. A strengthening in sterling against the dollar and the end of hyperinflation in some of its markets is set to wipe another £10 million from profits this year, if present trends continue.
It is the third time in less than 12 months that the company, which provides pest control, hygiene and wellbeing services, has cautioned about growth in its North American business, after initially announcing in October that winning new customers was proving more difficult than anticipated.
Sales in North America are expected to grow organically by about 1 per cent during the second half of the year, compared with 1.5 per cent in the second quarter and lower than an implied 2 per cent to 3 per cent increase needed to hit its full-year guidance of 2 per cent to 4 per cent, according to an analysis by Jefferies, the investment bank. The broader North American pest-control market is estimated to be growing at between 4 per cent and 5 per cent.
“It’s quite clearly a specific Rentokil issue,” Stephen Rawlinson, an analyst at Applied Value, said, pointing towards the much higher rate of growth that Rollins, the company’s main North American rival, has forecast for the year. Rollins announced a 10.9 per cent increase in organic revenue during the first six months of the year.
Sam Dindol, an analyst at Stifel, said the scale of the profit warning was a surprise, bearing in mind that higher marketing spending during the first half of the year had been expected to “move the dial” during the latter six months. “Clearly this has not happened and the low organic growth figure is a concern, given the full branch integration is not in full swing,” he said.
The FTSE 100 group underlined its exposure to North America with its 2021 acquisition of Terminix, a termite treatment specialist, for $6.7 billion. The region accounts for more than half of Rentokil’s sales. The deal will release cost synergies of $325 million, the company has said, $162 million of which have been realised.
However, disappointing sales in the third quarter hinted at friction between Rentokil’s focus on corporate customers with Terminix’s consumer bias. “They were very confident that they could get into Terminix, but business-to-consumer is a very, very different approach,” Rawlinson said.
Rentokil’s shares closed down by 95½p, or 20 per cent, at 380p.
Rentokil Initial is a company that has been built on acquisitions (Emma Powell writes). However, three warnings around the prospects for its North American business have raised questions over whether it has bitten off more than it can chew with a $6.7 billion deal for Terminix.
The takeover easily dwarfed the next largest deal overseen by Andy Ransom, the chief executive, the $425 million purchase of Steritech in 2015. Its rationale was to cement Rentokil’s No 1 position in the United States, a pest-control market worth more than $20 billion and one being boosted by population growth, climate growth and urbanisation. However, the latest warning has invited speculation that integrating the deal, which involves consolidating its US branches from 600 to 400, is proving difficult, even if the company insists that all is going to plan.
The cash-and-shares takeover of Terminix pushed Rentokil’s net debt up to £3.3 billion, or 3.8 times its adjusted earnings before interest, taxes and other items at the end of 2022. That has fallen to a multiple of 2.8 since then.
The slowdown in sales growth also could raise issues over the pace at which Rentokil can deliver on a medium-term target to reduce its net debt to a multiple of between two and 2.5. The company has said there will be no revisions to its targets, suggesting “modest” deleveraging this year.
The shares have fallen by 35 per cent over the past 12 months, which equates to a forward earnings multiple of 15, the lowest in almost a decade. As private equity firms and overseas investors circle the London market for cheap deals, Rentokil could turn from predator to prey.