Bottom Line: Rentokil answers the doubters

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RENTOKIL shares have fallen slightly from grace so far this year, left behind in the rush for high-yielding, cyclical recovery stocks and bothered by doubts about the pounds 75m paid for Securiguard this summer.

On both counts the stock market may have over-reacted. If yesterday's interim figures are any guide there has been no change in the Rentokil story of relentless margin improvement and high cash generation, suggesting that the 10 per cent share price underperformance this year may be gradually reversed.

Group operating margins rose by almost a tenth from 23.6 to 25.7 per cent, driving pre-tax profits 30 per cent higher to pounds 67.1m, or by 20 per cent - Rentokil's target growth rate - after stripping out a pounds 4.9m exchange translation gain.

Star turn was the UK, making up 40 per cent of the total, where profits jumped by 20.7 per cent on an 8 per cent sales gain as margins bounced up from 25.7 to a startling 28.5 per cent. A restored healthcare side, together with tropical plant acquisitions and a pick-up in beleaguered property care, were largely responsible.

But profits growth of 31.4 and 45 per cent in Europe and Asia/Pacific and Africa respectively, aside from currency benefits, also reflects the benign Rentokil circle of rising sales densities, service productivity and margins.

A big investment in sales and marketing - 20 per cent of turnover every year - coupled with meticulous route planning and premium pricing in selected market segments is the key in a deceptively simple operation. Rentokil's efforts in North America, where its largely tropical plants business has lifted margins from 5 per cent to an unlikely 18 per cent over a few years, show what can be done to Securiguard's similarly low margins in security manning.

Shorn of central overheads Securiguard will do better than cash in the bank in the second half, and assuming pre-tax profits approach pounds 150m this year a p/e of 23 and a yield of 1.7 per cent are a justified, high-growth rating.