The Investment Column: More bad news for shareholders at lacklustre Rentokil

Playtech, Inspicio
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The Independent Online

Our view: Sell

Share price: 152.25p(-7.5p)

It is nearly a year to the day since Gerry Robinson signalled his interest in Rentokil Initial, the pest control to tropical plants group. He first talked of buying the company and then of merely installing himself as executive chairman with the promise that he would engineer a turnaround at the ailing company.

Doug Flynn, Rentokil's chief executive, had little trouble fending Mr Robinson off. However, he has found it more difficult to enact a recovery at the company. Yesterday came yet another setback for its long-suffering shareholders. The group warned that profits at its textiles and washroom services business this year would not meet expectations. To blame are tough trading conditions in Europe.

The news is certainly a blow, and few were surprised to see Rentokil shares finished the day 5 per cent lower. The division is Rentokil's biggest, and accounts for a quarter of its total turnover. Alongside the warning were a lacklustre set of interim results. Profits fell 6.8 per cent to £102m during the six months to the end of June. At the textiles and washroom services division, they slumped by 18 per cent during the period.

It is clear now that Rentokil's long awaited recovery is still some way off.

Mr Flynn's bid to restore the group to health has seen him focus his reforms on streamlining the business, growing sales and disposals. So far there have been plenty of disposals. In November, Mr Flynn sold the group's conferences business for £325m, while earlier this year he dumped its UK and Canadian guarding operations for £105m.

However, on the sales growth front, the results have been less impressive. Although first-half revenues rose by 10 per cent, only a small proportion of this rise was generated organically.

Trading at 15 times forward earnings, with no evidence of a recovery in sight, Rentokil shares look to be overvalued.

Playtech

Our view: Worth a punt

Share price: 252p (+12p)

Playtech designs, develops and licences the software that powers the online gaming industry. Its clients include Ukbetting, BetFred and the Tote. Yesterday, the group posted maiden interim results, and they made very good reading. Profits leapt 172 per cent in the six months to the end of June, to $37m. Revenues were up 139 per cent to $46m.

The group's software powers the websites of 42 operators, who between then run 144 different gambling sites. It makes money by being paid royalties from the revenues generated by these operators. The more money they make, the more Playtech makes.

Of course, the group is exposed to an attack on the industry it services by the US authorities. When last month the American government launched its assault on BetonSports, Playtech shares lost a third of their value. However, it is not as vulnerable as it once was. A year ago, 62 per cent of the group's revenues came from the US. This figure stands at less than 50 per cent today as Playtech has increased its exposure to the fast-growing Asian market.

To this end, the Isle of Man headquartered group will later this year launch an online version of mahjong (the Chinese board game).

Playtech is also working on software that will allow punters to gamble via their mobile phones.

With the group valued at less than 10 times forward earnings and boasting a dividend yield of 4.2 per cent, its shares are worth a punt despite the risks associated with the online gaming industry.

Inspicio

Our view: Buy

Share price: 112.5p (unch)

In less than a year Inspicio has gone from cash shell to major player in the global testing and inspection market. It has done this via a series of acquisitions, and yesterday came news of two more - in Portugal and Australia.

By Inspicio's standards these purchases were small. However, the slew of deals completed by the group in the 12 months has led to worry that its management have lost focus on its key task of turning around the Inspectorate business they bought in October, and this has weighed on the group's shares.

Inspectorate operates mainly in the oil and mining industries, checking the concentration of hydrocarbons or the quality of precious metals.

When Inspicio bought the business, it promised to make it more profitable by cutting costs. Its aim is to increase profit margins at Inspectorate from 1.7 per cent to 8 per cent by 2008. Many peers enjoy margins of over 10 per cent. If the group's management achieve this, profits should take off.

Analysts predict last year's £2.7m loss at Inspicio will be turned into a profit of £4.3m this year, rising to £11.7m in 2007 and maybe reaching £18m in 2008. This puts the shares on a forward rating of under 13 times.

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