Rentokil: Robust First-Quarter Sales Growth Points to Ongoing Profit Margin Resilience in 2023

Rentokil Initial RTO 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.

Organic top-line growth of 6.4% for pest control—Rentokil’s largest category, accounting for 94% of the group’s operating profit following the Terminix acquisition—tracked ahead of our prior full-year expectations for about 5% year-on-year organic growth. We still expect the presently gloomy macroeconomic outlook to present a modest headwind to pest control volume growth in 2023. Consequently, we think the stronger-than-anticipated first-quarter pest control sales reflect the implementation of meaningful price increases aimed at protecting Rentokil’s profit margin from inflationary pressures that remain elevated in early 2023. As expected, the health and wellness category’s organic sales growth slowed to 5.5% in the first quarter, down from a heady 9.3% in 2022 as the boost in demand for hygiene services brought on by the pandemic continues to fade.