Rentokil Shares Plummet On Profit Warning

British pest control giant Rentokil Initial has taken a big share price hit amid a North America sales slump

Christopher Johnson 11 September, 2024 | 11:01AM
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Shares in pest control conglomerate Rentokil Initial (RTO) plummeted over 18% this morning on warnings that a slowdown in its North American business would lead to a fall in profits. They are now trading at £3.94.

The business announced that revised growth expectations and cost increases mean its adjusted operating profits are estimated to be £50 million less than expected. 

Rentokil's adjusted profit before tax and amortization is estimated to reach £700 million in 2024, down from analysts' expectations of £776 million for this year, and also below the £766 million it achieved last year. 

Revenues from North America, which account for around 60% of group sales following the parent company's $6.7 billion (£5.1 billion) acquisition of Terminix in 2021, are estimated to grow by just 1%, down from the 1.3% growth in the first half of the year.  

"While we saw some positive momentum in North America sales activity at the end of the second quarter, trading performance in July and August was lower than anticipated," its statement to the markets said.

"There has also been some modest disruption to organic growth from branch integration."

Key Morningstar Metrics For Rentokil Initial

• Economic Moat: Wide
• Fair Value Estimate: £6.20
• Forward Dividend Yield: 1.91%
• Morningstar Rating: ★★★★
• Sector: Industrials
• Morningstar Uncertainty Rating: Medium

The fall in share price erased more than £2 billion from Rentokil’s market capitalization.  

For Grant Slade, senior equity analyst at Morningstar, Rentokil's shares remain appealing, with its share price implying a turnaround is not out of reach in North America.  

"Both Rentokil and Terminix are highly visible brands in the North American market with the capacity for organic growth to normalize once the incremental sales and marketing investments take full effect.

"On this basis, we make no change to our fair value estimates of 620p that factor in a restoration of organic growth to approximately 4% from 2025 onward," he wrote in July 2024.  

Controversial activist investor Nelson Peltz took a stake in the business in June through his firm Trian Partners.

At the time of his involvement, Peltz said he would engage with Rentokil's leadership on "ideas and initiatives to improve shareholder value."

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Rentokil Initial PLC352.30 GBX-1.07Rating

About Author

Christopher Johnson  is data journalist at Morningstar

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