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.