Investment Column: Rentokil stays on its 20% target

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The Independent Online
SO "Mr 20 per cent" has done it again. Clive Thompson, chief executive of Rentokil Initial, has managed to achieve yet another year of 20 per cent growth in profits and earnings per share. That sort of increase has seen the group expand from a company worth just pounds 150m to one approaching pounds 9bn over the last 16 years.

With this sort of track record, it is perhaps harsh to criticise the group's prospects. However, the problem with setting such a demanding target is that everybody is waiting for you to fail and a number of City analysts harbour doubts that Rentokil can keep it up.

While that in itself is nothing new, Rentokil did only just reach its self-imposed earnings target last year and without the use of tax losses it inherited from its acquisition of BET in 1996 it would probably have missed its goal.

Rentokil's existing businesses that were not merged with any of BET's operations continued to show double-digit sales growth. However, like- for-like sales at those that were joined together fell 5 per cent.

Rentokil believes there is much scope for improvement and that sales growth should still show double-digit figures this year. A rise in margins, as Rentokil drags BET profits up to its own historic high levels, should allow the group to achieve an organic rise in earnings of, say, 15 per cent. Add in the benefits of a likely stream of bolt-on acquisitions and Sir Clive believes the 20 per cent target is in reach this year and for several years to come.

However, the feeling persists that Rentokil needs another big acquisition, and soon, to ensure its share price continues to rise. After all, even Rentokil is ready to admit that no company can grow on its own at 20 per cent for ever.

Rentokil is certainly out there looking for another large purchase. ISS, the Scandinavian cleaning group, Compass the caterer and Securicor have all been mentioned. If it can find the right deal, its share price could motor again. The danger is that the search could overshadow its operating performance.

Rentokil's profits rose 31 per cent to pounds 417m. However, analysts had expected a bit more, underestimating the damaging impact of sterling, and the shares slipped 5p to 308p.

Greig Middleton forecasts current-year profits of around pounds 505m, putting the shares on a prospective price-earnings ratio of 25. Rentokil should hold on to its premium rating but, until it can pull off another bid deal, the niggling doubts will remain, which are likely to limit the progress of its shares. Hold.

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