Rentokil Earnings: Dampened Economic Outlook Offers Minimal Challenge in Early 2023

Wide-moat Rentokil Initial’s RTO 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.

Organic sales growth for pest control—Rentokil’s largest category, accounting for 94% of group operating profit following the recent acquisition of Terminix—eased in the second quarter to 5.6%, from an elevated 6.4% in the first three months of 2023. The integration of Terminix into Rentokil’s North American operations is also progressing to plan in 2023. Rentokil realised USD 37 million in cost synergies in the first half of 2023 and remains on track to deliver against its cost synergy target of USD 200 million by the end of 2025.

The hygiene and wellness category also performed strongly in the first half of 2023, delivering revenue growth of 5.2%, excluding one-off pandemic-related disinfection revenue. The performance of the category’s core washroom services was particularly strong, offset partially by a softer organic performance from the premises and enhanced environment division.

We think the darkening economic outlook remains a modest headwind to organic growth throughout the remainder of 2023 and into 2024. Still, our long-term expectations are unchanged with global growth likely to rebound solidly in 2025.