Rentokil Initial Earnings: Further Terminix Synergy Benefits To Eventuate

Wide-moat Rentokil Initial’s RTO performance remained strong in late 2022. Consequently, its delivery of full-year 2022 adjusted revenue of GBP 3.52 billion and adjusted operating profit of GBP 542 million—representing year-on-year increases of 19% and 23%, respectively—provided us with little surprise and aligned broadly with our full-year estimates. The closure of the transformative Terminix acquisition in late 2022 was the major driver of the sizable year-on-year earnings uplift. Still, robust organic revenue growth and Rentokil’s tuck-in acquisition programme also contributed. Healthy price increases, which successfully insulated profit margins from elevated cost inflation in the period, also featured. With inflation pressures kept at bay, Rentokil’s group EBIT margin widened by 45 basis points year on year to 15.4%, as organic and acquisitive revenue growth drove improved service route density once again in 2022.

Our assessment of Rentokil’s long-term fundamentals is unchanged, with shareholders set to likely benefit from Rentokil’s ongoing efforts to roll up the still-fragmented pest control and hygiene services industries. Nonetheless, with Rentokil increasingly confident on the ultimate level of cost synergies it will realise from the Terminix acquisition, we raise our fair value estimate by 5% to GBX 580/USD 35.50. Rentokil now expects to strip USD 200 million in annual costs from the Terminix cost base by 2025, up from its prior annual cost synergy target of USD 150 million. We think the improved synergy and profit margin outlook speaks to the merits of the deal, both from the potential for shareholder value creation and from an economic moat reinforcing perspective. A time-value-of-money adjustment also contributes to our upgraded valuation. Investors cheered Rentokil’s upgraded synergy target, sending Rentokil shares 9% higher on the day. Rentokil shares screen as fairly valued, trading at a slim 6% discount to our revised valuation.