Rentokil ripe for profit-taking

MFI Furniture; Elementis  
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The Independent Online

Sir Clive Thompson says he could be up for the TV series Back To The Floor. But the immaculate chief executive of Rentokil Initial is not ready yet to don overalls for a stint of toilet cleaning or rat catching since he can't choose which of the group's myriad blue-collar businesses he would feel the need to visit, professing himself an expert in them all.

It is true that he has spent the last two years focusing on the business minutiae at Rentokil, with a view to restoring above-industry growth and so rebuild his City fanbase.

Full-year results yesterday were another step on the road to rehabilitation. After Rentokil missed its historic 20 per cent growth target two years ago, Sir Clive has hived off the underperforming 30 per cent of the group and initiated a share buy-back to boost earnings.

These were duly up 14 per cent in 2001. Profit before tax was £374.3m, bang in line with forecasts. The business continues to make progress, with organic sales growth of 5.7 per cent in the second half.

Much was made yesterday of staff training, which has ensured productivity increases more than offset continuing price pressures across the range of blue-collar services offered by the group. These now span cleaning, pest control, tropical plant hire, security guards and parcel couriers.

Sir Clive should have little difficulty delivering his promise of 8 to 15 per cent annual earnings growth, with further buy-backs and new acquisitions in hygiene and security on the cards. But with its high margins, Rentokil finds itself in the firing line in numerous local price wars, and is relying on driving harder bargains from its suppliers to boost profits next year. Sales growth will be more modest, just when the company needs something more exciting to spur further progress

The company has seen its shares more than double in 18 months and, up 5.75p to 266.75p, they now sit on 18 times forecasts of this year's earnings. While the stock is unlikely to fall back to its floor of 125p in 2000, investors should now cash in their recent profits.

MFI Furniture

MFI furniture was a busted flush three years ago, with high debts and a brand image that was questionable at best. But the business has been transformed since John Hancock arrived from WH Smith as chief executive. He has cut debts with sale and leasebacks, stripped out under-performing products and added a dash of style to what had become a moribund format. The result is sales that have topped £1bn for the first time and profits before exceptional items are up 42.5 per cent on the year to £64.7m.

Mr Hancock's confidence in future growth is underlined by his decision to spend £15m on a new IT system which can cope with a business achieving annual sales of £2bn. The shares have responded in style, soaring to 148p from the low point of 25p in 1999.

The question is whether this is as good as it gets. MFI has proved a horribly cyclical performer in the past and the group is more exposed to interest rate rises than most retailers. There is, therefore, an argument for locking in profits.

But like-for-like sales are currently 11 per cent ahead of the same time last year, with Mr Hancock saying he sees no sign of a slowdown. The 18 Conran-designed out of town stores are achieving sales uplifts of 20 to 50 per cent and there are now 112 branches of Hygena at Currys, adding another growth opportunity. With high market shares in kitchens and bedrooms, MFI is expanding into new product areas, such as bathrooms and sofas. Overseas expansion is on the agenda in France where the group wants 170 stores compared to the current 125 and in Taiwan where a trial has been started. Howdens, the group's rapidly growing joinery specialist, will also be taken abroad.

On 17 times this year's earnings the shares are not cheap but still have some upside.

Elementis

The annual results statement from Elementis, the chemicals group specialising in pigments, was always going to be a shocker. The global recession has hit demand, but the company has gone into crisis management mode to make the best of the terrible trading conditions. Some factory production has been halted and inventory levels reduced.

A £42.1m profit in 2000 was turned to a £3.7m loss in 2001, but there was good news on current trading with the new management pointing to some evidence that the worst of customers' destocking is now over. The group also successfully conserved cash.

The shares have slid in recent weeks on fears its chrome business is facing the loss of 15 per cent of its sales from 2004 after a chrome-based chemical was banned in the US as a wood preservative. That is now in the price. What is not is the possibility that the issue could force the group to consider disposals. The stock, at 24p, is a speculative recovery play.

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