Bottom Line: Rentokil shows strains of expansion

IT'S OFFICIAL: the widely admired profit margins earned by Rentokil, the hygiene and office services concern, are under pressure.

Some margin erosion was expected as Rentokil absorbed the inherently less lucrative Securiguard security business. The new worry is the Australian end of Rentokil's established operation and slower-than-expected growth in Europe.

Turnover grew by 40 per cent to pounds 357m for the six months to 30 June - largely thanks to the pounds 75m purchase of Securiguard this time last year. But pre-tax profits grew 20 per cent to pounds 80.6m as operating profit margins across the group slipped from 25.6 per cent to 22.3 per cent.

In response, Rentokil shares, which have been moving sideways in relative terms for a couple of years, fell 5 per cent to 222p.

Underlying growth of 13 per cent would be more than respectable for most companies, but not Rentokil, where 20 per cent is the norm.

Management difficulties were blamed for the Australian disappointment. But the problem has been how to exploit most effectively the growth opportunities.

And despite being shackled by Australia, Rentokil's Asia Pacific business as a whole still managed the requisite 20 per cent profits advance. Had Australia behaved, Asia Pacific would have won a 30 per cent increase.

Analysts scaled back full-year profit estimates from about pounds 180m to pounds 175m. That is equivalent to earnings of 11.8p and puts the shares on a forward p/e ratio of 19 times, a heady rating in combination with a 1.9 per cent gross yield after a 20 per cent dividend rise.

Rentokil shares peaked along with the rest of the stock market in early February. The stock has fallen by one-fifth since touching 279p, and in the same period has underperformed its peers by 10 per cent as highly-rated stocks were hit.

Despite this retreat Rentokil is still one of the best-rated stocks in its sector and trades at a 30 per cent premium to the market as a whole.

Cynics have not yet tripped up Rentokil but the strains of expansion are showing and the days of relentless outperformance may have gone.

Start your day with The Independent, sign up for daily news emails
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Editor-in-chief - Financial Services - City, London

£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Guru Careers: Management Accountant

£27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

Guru Careers: Project Manager / Business Analyst

£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

Day In a Page

General Election 2015: ‘We will not sit down with Nicola Sturgeon’, says Ed Balls

'We will not sit down with Nicola Sturgeon'

In an exclusive interview, Ed Balls says he won't negotiate his first Budget with SNP MPs - even if Labour need their votes to secure its passage
VE Day 70th anniversary: How ordinary Britons celebrated the end of war in Europe

How ordinary Britons celebrated VE Day

Our perception of VE Day usually involves crowds of giddy Britons casting off the shackles of war with gay abandon. The truth was more nuanced
They came in with William Caxton's printing press, but typefaces still matter in the digital age

Typefaces still matter in the digital age

A new typeface once took years to create, now thousands are available at the click of a drop-down menu. So why do most of us still rely on the old classics, asks Meg Carter?
Discovery of 'missing link' between the two main life-forms on Earth could explain evolution of animals, say scientists

'Missing link' between Earth's two life-forms found

New microbial species tells us something about our dark past, say scientists
The Pan Am Experience is a 'flight' back to the 1970s that never takes off - at least, not literally

Pan Am Experience: A 'flight' back to the 70s

Tim Walker checks in and checks out a four-hour journey with a difference
Humans aren't alone in indulging in politics - it's everywhere in the animal world

Humans aren't alone in indulging in politics

Voting, mutual back-scratching, coups and charismatic leaders - it's everywhere in the animal world
Crisp sales are in decline - but this tasty trivia might tempt back the turncoats

Crisp sales are in decline

As a nation we're filling up on popcorn and pitta chips and forsaking their potato-based predecessors
Ronald McDonald the muse? Why Banksy, Ron English and Keith Coventry are lovin' Maccy D's

Ronald McDonald the muse

A new wave of artists is taking inspiration from the fast food chain
13 best picnic blankets

13 best picnic blankets

Dine al fresco without the grass stains and damp bottoms with something from our pick of picnic rugs
Barcelona 3 Bayern Munich 0 player ratings: Lionel Messi scores twice - but does he score highest in our ratings?

Barcelona vs Bayern Munich player ratings

Lionel Messi scores twice - but does he score highest in our ratings?
Martin Guptill: Explosive New Zealand batsman who sets the range for Kiwis' big guns

Explosive batsman who sets the range for Kiwis' big guns

Martin Guptill has smashed early runs for Derbyshire and tells Richard Edwards to expect more from the 'freakish' Brendon McCullum and his buoyant team during their tour of England
General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'