The Investment Column: Rentokil could still be poisonous

Avis Europe faces tough journey back into profit - Hold Capita to enjoy the hated congestion charge
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The Independent Online

Getting rid of rats, wasps, cockroaches and other creepy crawlies is not a pretty business, but Rentokil Initial, whose name is synonymous with pest control, has had an attractive performance history, producing earnings growth of 20 per cent every year for 17 years.

A shock profits warning last year, however, flushed out a horde of problems. The management team was exterminated (in a metaphorical sense), with the chairman, Clive Thompson, and James Wilde, the chief executive, departing. Problems had been allowed to roost during two decades of under-investment. Facing increased competition in the market for cleaning, security and facilities management, Rentokil, which had scrimped on customer service and sales personnel for years, lost business.

Brian McGowan, who stepped up to become executive chairman after Mr Wilde left, admitted yesterday that the results did not make "pretty reading" and were largely self-inflicted by the previous management. All business divisions bar parcel delivery went into decline. The group published profits before tax for the year of £350m, down 12 per cent on 2003 profits.

Mr McGowan has been piling resources back into the business, which is hurting profits in the short term. On the horizon, though, he has promised a return to contract wins.

Here enters Doug Flynn, the former chief executive of Aegis, who will take up the same post at Rentokil. He has been given carte blanche by the board for the company's future, which could include a break-up.

This all means it could be time for a speculative buy in Rentokil. Its markets, like any for outsourced services, is competitive but if Rentokil can reassert its brand, it could start regaining ground. Until the fumes forcing the company to change settle, however, investors could get bitten. Wait until the traps have been checked.

Avis Europe faces tough journey back into profit

Car rental companies such as Avis Europe have been on a bumpy road since the threat of global terrorism and economic slumps have reduced travel.

Announcing full-year results yesterday, the company, which owns the Avis and Budget brands outside the US and Australia, said its recovery was under way, thanks to cost cutting. But the market remains extremely competitive. Just as low-cost airlines are battling for business in the skies, car rental companies are also facing fierce competition after the advent of new rivals on the internet.

Avis bought its rival Budget brand last year, hoping to shore up its leading market position. But Budget was in worse shape than Avis and its losses widened this year to €8m (£5.5m). It will be at least two years before it becomes profitable.

The Belgian car retailer D'Ieteren owns almost 60 per cent of the company, and there has been speculation that it may bid for the rest. This is a long shot, however, and the business still has major issues to contend with, not least turning around Budget. There is also little prospect of price increases while Continental European economies remain weak. Avoid.

Hold Capita to enjoy the hated congestion charge

The latest results and outlook of Capita, the outsourcing specialist, were as positive as people could have expected them to be. It is already on course to make £230m out of its five-year contract to manage the London congestion charge - and said yesterday it would make an additional £38m of revenue if the contract is extended to February 2009, as seems likely.

The news is sure to anger drivers who have criticised glitches in the group's payment systems, but Capita maintains that the problems have been dealt with and its annual profits jumped by 22 per cent to a record £148m. Margins have improved thanks to cost cutting and internal economies of scale, achieved as it wins more business. Half of the payments made each year from the congestion charge scheme are now received over the internet or through text messaging. These are cheaper and more efficient means of bringing in revenues than those collected through a plethora of retail outlets.

After buying back 8.9 million shares last year, Capita plans to repurchase up to 10 per cent of its shares this year. This will keep a prop under earnings growth, as there will be more profits to divide between fewer shares.

Despite the rejection of a congestion charge in Edinburgh, the company will continue to benefit from outsourcing trends in both government and financial services and should be able to defend its position as market leader. The shares trade at about 21 times 2005 earnings. Not cheap, but further growth makes the shares worth holding.