Company Reports

Wide-moat Rentokil Initial’s recently announced North America sales and marketing initiatives are showing signs of modest success in early 2024. First-quarter organic pest control sales growth of 1.5% in North America represents decent progress following a decidedly weak finish to 2023 and tracks in line with our expectations for 2% organic growth in 2024—reflecting a modest improvement in sales performance in Rentokil’s largest and most important market. For the broader pest control category, organic sales grew 2.7% in the first quarter, in broad agreement with our full-year 2024 forecast of about 3.5%. Elsewhere, first-quarter organic growth of 3.8% for the smaller hygiene & wellbeing category tracked broadly in line with our full-year expectations of about 4.5% in 2024. While the first-quarter performance was a touch soft, we make no change to our full-year financial estimates or our GBX 600 fair value estimate.

Rentokil Initial's strategy is sharply focused on the attainment and maintenance of market share leadership in the highly localised pest-control and hygiene-service markets it competes in. The strategy aims to benefit from ever-improving unit costs offered by economies of density in each localised geography in which Rentokil Initial operates via organic growth and a strong acquisition impetus aimed at rolling up the pest-control and hygiene-service markets, which remain substantially fragmented. To this end, Rentokil Initial has completed over 200 acquisitions since 2015—and has spent an average of GBP 300 million on tuck-in mergers and acquisitions annually over 2018-23 (excluding Terminix)—focusing on acquisition targets that build geographic density of its customers. The late 2022 acquisition of Terminix Global Holdings was a transformative and moat-reinforcing deal, creating a new U.S. market share leader. Pest-control targets remain Rentokil's top M&A priority, but tuck-in candidates for the hygiene segment are now also set to become a focus. The successful execution of the strategy has delivered a durable cost advantage for the pest-control business—the source of our wide economic moat rating for Rentokil Initial.

While the organic sales performance for wide-moat Rentokil Initial’s pest control franchise remained weak in late 2023, investors were nonetheless relieved by Rentokil’s plans to restore growth its North American business, sending shares some 15% higher in early trade. Full-year EBIT of GBP 897 million fell short about 1.5% short of our expectations—owing largely to weaker-than-expected organic pest control performance as full-year organic growth of 4.5% trailed our expectations by about 50 basis points. A weaker-than-expected second-half improvement in EBIT margin in Rentokil’s smaller hygiene & wellbeing category also contributed to the weaker-than-expected result.

Investors were disappointed by decidedly weak third-quarter organic revenue growth of 2.3% for Rentokil Initial’s pest control category—the group’s largest category, accounting for 94% of total operating profit following the recent Terminix acquisition. Tepid demand for pest control services in North America—the pest control business’ most important geography, accounting for 75% of pest control sales—and a contraction in wholesale pest control product distribution sales drove the soft result. Elsewhere, Rentokil’s hygiene and wellbeing category delivered robust third-quarter organic sales growth of 5.7%, which tracks our full-year expectations.

Rentokil Initial's strategy is sharply focused on the attainment and maintenance of market share leadership in the highly localised pest-control and hygiene-service markets it competes in. The strategy aims to benefit from ever-improving unit costs offered by economies of density in each localised geography in which Rentokil Initial operates via organic growth and a strong acquisition impetus aimed at rolling up the pest-control and hygiene-service markets, which remain substantially fragmented. To this end, Rentokil Initial has completed over 200 acquisitions since 2015—and has spent an average of GBP 310 million on mergers and acquisitions annually over 2018-22—focusing on acquisition targets that build geographic density of its customers. Further, the late 2022 acquisition of Terminix Global Holdings is a transformative and moat-reinforcing deal, creating a new U.S. market share leader. Pest-control targets remain Rentokil's top M&A priority, but tuck-in candidates for the hygiene segment are now also set to become a focus. The successful execution of the strategy has delivered a durable cost advantage for the pest-control business—the source of our wide economic moat rating for Rentokil Initial.

Rentokil Initial's strategy is sharply focused on the attainment and maintenance of market share leadership in the highly localised pest-control and hygiene-service markets it competes in. The strategy aims to benefit from ever-improving unit costs offered by economies of density in each localised geography in which Rentokil Initial operates via organic growth and a strong acquisition impetus aimed at rolling up the pest-control and hygiene-service markets, which remain substantially fragmented. To this end, Rentokil Initial has completed over 200 acquisitions since 2015—and has spent an average of GBP 310 million on mergers and acquisitions annually over 2018-22—focusing on acquisition targets that build geographic density of its customers. Further, the late 2022 acquisition of Terminix Global Holdings is a transformative and moat-reinforcing deal, creating a new U.S. market share leader. Pest-control targets remain Rentokil's top M&A priority, but tuck-in candidates for the hygiene segment are now also set to become a focus. The successful execution of the strategy has delivered a durable cost advantage for the pest-control business—the source of our wide economic moat rating for Rentokil Initial.

Wide-moat Rentokil Initial’s 2023 interim result was robust, with its performance in the first six months of 2023 largely unhindered by expectations for softening economic conditions in its two largest markets—the U.S. and Europe. Still, organic growth softened slightly in the second quarter to 5.9%, down from a heightened 6.7% in the first three months of the year, aligning with our expectations for a modest slowing in organic pest control and hygiene volumes as 2023 progresses. Our 2023 estimates remain largely unchanged—we forecast full-year EBIT of GBP 935 million and EPS of GBP 0.24—as do our long-term expectations for the wide-moat stock. Nonetheless, a time value of money adjustment leads us to lift our fair value estimate by 3% to GBX 600/USD 38. Rentokil shares screen as modestly overvalued, trading at a 4% premium to our revised valuation.

Rentokil Initial delivered a healthy set of first-quarter 2023 trading updates that align with our near-term expectations of continued profit margin resilience—in the face of inflationary pressures that remain elevated—and of relative insensitivity in demand for pest control and hygiene services to a more challenged economic outlook in 2023. While slightly stronger-than-expected pest control sales lead us to nudge up our full-year 2023 EBIT estimate by a modest 1% to GBP 934 million, our long-term expectations for the wide-moat stock remain unchanged as does our GBX 580/USD 37 fair value estimate. Rentokil shares screen as approximately fairly valued, trading at a slim premium to our fair value estimate.

Rentokil Initial's strategy is sharply focused on the attainment and maintenance of market share leadership in the highly localised pest-control and hygiene-service markets it competes in. The strategy aims to benefit from ever-improving unit costs offered by economies of density in each localised geography in which Rentokil Initial operates via organic growth and a strong acquisition impetus aimed at rolling up the pest-control and hygiene-service markets, which remain substantially fragmented. To this end, Rentokil Initial has completed over 200 acquisitions since 2015—and has spent an average of GBP 310 million on mergers and acquisitions annually over 2018-22—focusing on acquisition targets that build geographic density of its customers. Further, the late 2022 acquisition of Terminix Global Holdings is a transformative and moat-reinforcing deal, creating a new U.S. market share leader. Pest-control targets remain Rentokil's top M&A priority, but tuck-in candidates for the hygiene segment are now also set to become a focus. The successful execution of the strategy has delivered a durable cost advantage for the pest-control business—the source of our wide economic moat rating for Rentokil Initial.

Wide-moat Rentokil Initial’s 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.

Rentokil Initial's strategy is sharply focused on the attainment and maintenance of market share leadership in the highly localised pest-control and hygiene-service markets it competes in. The strategy aims to benefit from ever-improving unit costs offered by economies of density in each localised geography in which Rentokil Initial operates via organic growth and a strong acquisition impetus aimed at rolling up the pest-control and hygiene-service markets, which remain substantially fragmented. To this end, Rentokil Initial has completed over 200 acquisitions since 2015—and has spent an average of GBP 310 million on mergers and acquisitions annually over 2018-22—focusing on acquisition targets that build geographic density of its customers. Further, the late 2022 acquisition of Terminix Global Holdings is a transformative and moat-reinforcing deal, creating a new U.S. market share leader. Pest-control targets remain Rentokil's top M&A priority, but tuck-in candidates for the hygiene segment are now also set to become a focus. The successful execution of the strategy has delivered a durable cost advantage for the pest-control business—the source of our wide economic moat rating for Rentokil Initial.

Rentokil Initial's strategy is sharply focused on the attainment and maintenance of market share leadership in the highly localised pest-control and hygiene-service markets it competes in. The strategy aims to benefit from ever-improving unit costs offered by economies of density in each localised geography in which Rentokil Initial operates via organic growth and a strong acquisition impetus aimed at rolling up the pest-control and hygiene-service markets, which remain substantially fragmented. To this end, Rentokil Initial has completed over 200 acquisitions since 2015—and has spent an average of GBP 330 million on mergers and acquisitions annually over 2017-21—focusing on acquisition targets that build geographic density of its customers. Further, the late 2022 acquisition of Terminix Global Holdings is a transformative and moat-reinforcing deal, creating a new U.S. market share leader. Pest-control targets remain Rentokil's top M&A priority, but tuck-in candidates for the hygiene segment are now also set to become a focus. The successful execution of the strategy has delivered a durable cost advantage for the pest-control business—the source of our wide economic moat rating for Rentokil Initial.

Rentokil Initial's strategy is sharply focused on the attainment and maintenance of market share leadership within the highly localised pest-control and hygiene service markets it competes in. The strategy aims to benefit from ever-improving unit costs offered by economies of density within each localised geography in which Rentokil Initial operates—via organic growth and a strong acquisition impetus aimed at rolling up pest-control and hygiene service markets, which remain substantially fragmented. To this end, Rentokil Initial has completed over 200 acquisitions since 2015—and has spent an average of GBP 330 million on mergers and acquisitions annually over 2017-21—focusing on acquisition targets that build geographic density of the group's customers. Further, the late 2022 acquisition of Terminix Global Holdings is a transformative and moat-reinforcing deal, creating a new U.S. market share leader. Pest-control targets remain Rentokil's top M&A priority but tuck-in candidates for the hygiene segment are now also set to become a focus. The successful execution of the strategy has delivered a durable cost advantage for the pest-control business—the source of our wide economic moat rating for Rentokil Initial.

Rentokil Initial remains on track for a robust full-year performance in 2022, unveiling continued top-line strength we'd anticipated in its third-quarter trading update. With our long-term expectations for Rentokil Initial unchanged, we retain our fair value estimate of GBX 550/USD 31.50 per share. Rentokil Initial shares screen as approximately fairly valued.

Rentokil Initial’s proposed $6.7 billion acquisition of Terminix Global Holdings has succeeded, with shareholders on both sides of the deal recently approving the transformative tie-up. With the deal having created the world’s largest pest control business, Rentokil Initial’s focus will now shift promptly to delivering the USD 150 million in annual cost synergies promised under the deal. We’ve updated our financial estimates for Rentokil Initial to account for the transaction’s closure which proceeded on Oct. 12. Accordingly, consolidation of earnings from Terminix leads us to upgrade our 2022 group EBIT forecast by 10% to GBP 566 million. Nonetheless, the integration of Terminix’s financials has no impact on our valuation, having previously factored the deal into our fair value estimate for Rentokil Initial when it was announced in late 2021—for greater detail, please see our note “Rentokil’s Full Offer Price for Terminix Leaves Little Room for Slippage in Synergy Delivery” dated Dec. 15, 2021. Still, a time value of money adjustment leads us to raise Rentokil Initial’s fair value estimate by about 3% to GBX 550. Following recent share price weakness—inspired by the repricing of U.K. financial assets since its government announced a broad package of debt-funded tax cuts on Sept. 23, 2022—the wide-moat stock screens at an attractive 14% discount to fair value.

Rentokil Initial's strategy is sharply focused on the attainment and maintenance of market share leadership within the highly localised pest-control and hygiene service markets it competes in. The strategy aims to benefit from ever-improving unit costs offered by economies of density within each localised geography in which Rentokil Initial operates—via organic growth and a strong acquisition impetus aimed at rolling up pest-control and hygiene service markets, which remain substantially fragmented. To this end, Rentokil Initial has completed over 200 acquisitions since 2015—and has spent an average of GBP 330 million on mergers and acquisitions annually over 2017-21—focusing on acquisition targets that build geographic density of the group's customers. Further, the late 2022 acquisition of Terminix Global Holdings is a transformative and moat-reinforcing deal, creating a new U.S. market share leader. Pest-control targets remain Rentokil's top M&A priority but tuck-in candidates for the hygiene segment are now also set to become a focus. The successful execution of the strategy has delivered a durable cost advantage for the pest-control business—the source of our wide economic moat rating for Rentokil Initial.

Rentokil Initial is comfortably navigating the global spike in inflation that has proven both substantial and persistent in 2022 to date. While direct costs, in particular fuel and wage costs, increased significantly in the first half of 2022, robust price increases have fully offset any negative impact to margins, as we’d anticipated. First-half 2022 group operating margin strengthened to 14.9%, up from 14.3% in the prior year, highlighting the inherently inflation-resistant nature of Rentokil’s global pest control and hygiene services franchise. We make no change to our GBX 535 fair value estimate. While Rentokil Initial is our preferred pest control exposure, we see little upside with the stock trading at a slim 3% discount to our valuation.

Rentokil Initial’s strategy is sharply focused on the attainment and maintenance of market share leadership within the highly localised pest-control and hygiene service markets it competes in. The strategy aims to benefit from ever-improving unit costs offered by economies of density within each localised geography in which Rentokil Initial operates--via organic growth and a strong acquisition impetus aimed at rolling up pest-control and hygiene service markets, which remain substantially fragmented. To this end, Rentokil Initial has completed over 200 acquisitions since 2015--spending an average of GBP 330 million on mergers and acquisitions annually over 2015-20--focusing on acquisition targets that build geographic density of the group’s customers. Pest-control acquisitions remain Rentokil’s top M&A priority but tuck-in candidates for the hygiene segment are now also set to become a focus. The successful execution of the strategy has delivered a maintainable cost advantage for the pest-control business, which is the source of our wide economic moat for Rentokil Initial.

As we’d anticipated, mounting inflationary pressures are offering little challenge to Rentokil Initial in early 2022. Robust price increases in both Rentokil’s pest control and hygiene & wellbeing categories provided a full offset to cost inflation and contributed to a solid first-quarter ongoing revenue growth rate of 12.3%. While we have lowered our full-year 2022 EBIT forecast by a slim 2% to GBP 522 million—to account for the dampening impact we expect the ongoing war in Ukraine will have on global economic growth—our long-term thesis for the wide-moat name remains unchanged as does our GBX 535 per share fair value estimate. Rentokil Initial shares screen as fairly valued, with the stock price reacting positively to the solid first-quarter trading update.

Rentokil Initial closed out the final quarter of 2021 with continued strength in what was a vigorous year of organic growth. Both its pest control and hygiene franchises benefited handsomely from a global economic recovery from the impact of the coronavirus pandemic. The result aligned with our forecast, with full-year adjusted EBIT of GBP 442 million improving 19.5% year on year on a constant currency basis. Nonetheless, shares traded approximately 5% lower following the result. We think investors were likely surprised by Rentokil’s elevated capital expenditure outlook for 2022. However, with the heightened near-term capital spend representing largely "catch-up" in reinvestment in the business--as opposed to a sustained step-up in the capital intensity of the business--our long-term expectations for the wide-moat stock are unchanged. Accordingly, we make no change to our fair value estimate of GBX 535 per share and continue to anticipate strong operating profit growth over the coming decade as Rentokil garners further economies of density benefits--both from a combination of solid organic revenue growth and its M&A programme. Rentokil Initial shares trade at a 7% discount to our unchanged valuation.