BET saves the day for Rentokil

The Investment Column

edited by Sameena Ahmad

It has taken Sir Clive Thompson, chief executive of Rentokil Initial, almost 18 months to admit what everyone always suspected - that without BET, the business services giant bought for pounds 2.1bn in March last year, he risked failing to honour his self-imposed contract with the City to grow earnings by 20 per cent a year.

But while Sir Clive remains fixated on maintaining Rentokil's 15-year unbroken earnings record - after a pounds 14m currency hit, earnings growth for the half year to June scraped in at 20.3 per cent - the City has been more preocuppied with whether Rentokil deserves to keep its fancy rating following the BET buy.

Swallowing BET to compensate for a slowdown in growth in the old Rentokil businesses is all very well, but to do it Rentokil has had to take on lower-quality businesses. Compared with old Rentokil businesses like pest control and tropical plants which enjoy operating margins of over 30 per cent, BET has brought in a number of commodity-type operations - like back-end office cleaning - and highly cyclical and capital intensive activities like US plant hire and conference centres. It is right then that Rentokil's shares, which stood on a 65 per cent premium to the market before the BET bid, have been downgraded. Shares in the company have underperformed the stock market by 14 per cent over the last 12 months.

The question is whether the current rating, reflecting a market premium of about 30 per cent, is appropriate. Unfortunately these interim results offer little guidance. The results reflected a full contribution from BET, against to two months last time. But Rentokil refused to spell out the BET results.

The concerns are simple. What investors really want to know are what exactly are the sustainable growth prospects of this company. By how much are the old Rentokil businesses slowing? Are they growing at all? What about BET? On the one hand, Sir Clive admitted yesterday that Rentokil's UK pest control is mature. On the other, prospects for BET's electronic security operations, though a small part of the total, look positive.

What is likely is that Sir Clive won't be able to meet his 20 per cent target for ever. Yes, there can be adjustments on investment levels here and there to bring the figures in line. But the City is expecting a a bigger slowdown than just a per cent or two. What no one is clear about is whether Rentokil will slow down to 10 per cent earnings growth a year or 15 per cent. Let's not forget that Rentokil is a tightly managed business. It has good growth business, a dominant market position in areas like cleaning and hygiene and a great geographical spread. That means the company is more likely to settle at 15 or 16 per cent annual growth than 10 per cent. In these low inflationary times, that is good. Rentokil probably does not deserve a fancy rating, but 21 times this year and 18 times 1998 on Merrill Lynch forecasts, looks fair.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee