Investment: Rentokil finally slips up on the percentage play

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The Independent Online
SO, FAREWELL then, Mister Twenty Per Cent. For the past 13 years Sir Clive Thompson, chief executive of Rentokil, has consistently met his self-imposed target of raising the services group's earnings per share by at least a fifth. But in the first six months of this year Rentokil failed. And the title Mister 18.7 per cent just doesn't have the same ring to it.

To be fair, Rentokil didn't miss by much. Exclude the effects of the strong pound, which depressed the value of overseas profits, and earnings were up 26 per cent. But Sir Clive isn't making any excuses. And he is doggedly sticking to the target even though he admits it has become a bit of a millstone.

This looks unrealistic. Although Rentokil's profit performance was respectable, sales were not. Even allowing for exchange rates, revenue growth in the UK and Asia-Pacific was pedestrian. In North America sales actually fell as Rentokil sold unwanted businesses and pulled out of low-margin contracts. Only continental Europe, emerging from a prolonged downturn, lifted the gloom with a 17 per cent increase.

Sir Clive reckons Rentokil can meet its target without large acquisitions. But operating margins can only stretch so far and sooner or later the company will need a repeat of its 1996 acquisition of BET, with the resultant cost savings and efficiency gains.

Given its size, however, Rentokil will find suitable deals a lot harder to come by. And the suspicion remains that meeting the earnings target will be more about questionable accounting policies - Rentokil has decided not to write off goodwill on acquisitions against profits - than true growth.

Rentokil shares slipped 14p to 365p yesterday and are down 20 per cent from their June high. But they still trade on a chunky multiple of almost 30 times forecast full-year earnings. Given the uncertainty over Rentokil's future growth, the shares are high enough.