BET saves the day for Rentokil
The Investment Column
Thursday 21 August 1997
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.
- 2 Moscow voted the world's unfriendliest city
- 3 The excuses your boss is most likely to believe when you call in sick
- 4 I'm pansexual – here are the five biggest misconceptions about my sexuality
- 5 More than 11,000 Icelanders offer to house Syrian refugees to help European crisis
The excuses your boss is most likely to believe when you call in sick
Bono's group has made more money from Facebook investment than from all his music
Three-year-old ultra-Orthodox Jewish children told 'the non-Jews' are 'evil' in worksheet produced by London school
Wikipedia rocked by 'rogue editors' blackmail scam targeting small businesses and celebrities
More than 11,000 Icelanders offer to house Syrian refugees to help European crisis
Climate change: 2015 will be the hottest year on record 'by a mile', experts say
Jeremy Corbyn calls Osama bin Laden's killing a 'tragedy' - but was it taken out of context?
If these extraordinarily powerful images of a dead Syrian child washed up on a beach don’t change Europe’s attitude to refugees, what will?
Senior British politicians tell David Cameron: When dead children are being washed up on beaches, it's time to act
If you're not already angry about the refugee crisis, here's a history lesson to remind you why you really should be
Theresa May says migrants should be banned from entering the UK unless they have jobs lined up
iJobs Money & Business
£14000 - £16000 per annum: Recruitment Genius: This company was established in...
£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...
£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...
Voluntary and unpaid, reasonable expenses reimbursable: Reach Volunteering: St...