Rentokil Initial: Shares Appealing As Weak Pest Control Sales Offer an Attractive Entry Point

Investors were disappointed by decidedly weak third-quarter organic revenue growth of 2.3% for Rentokil RTO 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.

While we’d expected organic growth for the pest control business would moderate in late 2023—from an elevated 5.6% in the first half of 2023—conditions in North America have deteriorated more sharply than we’d previously credited. As a result, we lower our full-year EBIT and EPS forecasts by a respective 2% and 3% to GBP 913 million and GBP 0.23. Still, we think investors—who have sent shares some 15% lower as of the time of writing—have overreacted to the softened performance of the pest control category in late 2023. With our long-term outlook and GBX 600/USD 36 fair value estimate unchanged, Rentokil shares appeal. An attractive entry point into the wide-moat stock currently exists with shares trading at an approximate 15% discount to our valuation.

As we’ve previously posited, we think the softening global economic outlook represents a modest dampener to Rentokil’s organic growth throughout the remainder of 2023 and into 2024. Still, we view the softened economic conditions as a transitory headwind and expect global growth to rebound solidly in 2025.