Rentokil in freefall on shock profits warning

Shares in Rentokil were sent into a downward spiral after the rat catching and support services conglomerate issued a surprise profits warning yesterday.

The company said its Initial City Link courier business was likely to deliver "up to 10m" less in fourth-quarter profits than previously thought. Rentokil, which is also engaged in pest control, textiles and washroom services, attributed the gloomy outlook to "weaker consumer spending in a challenging retail environment".

Owing to what it called "an industry-wide trend", the company said: "The anticipated surge in volumes seen in prior years in the business-to-consumer segment [of the City Link business] has been later and less than expected... Volumes have slipped below the level experienced this time last year and business-to-business volumes, which had been significantly ahead, are now in line with last year's levels."

The news, which comes barely a month after the company revealed its third-quarter earnings, surprised the market and sent the company's shares into freefall. Rentokil's stock, which hit a high of 180.5p in May, lost 22 per cent and closed down 32.4p at 114.3p, making it the biggest faller on the FTSE 100 yesterday.

Some analysts read the update as an "early warning" for the UK economy. Robert Morton, a research analyst at Investec, said the announcement was "completely unexpected". He added: "It was a very sudden and specific update. It has come so soon after their results last month we did not anticipate a revision in estimates now. City Link is one of their big bets and it is bound have an impact on the wider group."

David Greenall, an analyst at Cenkos Securities, echoed Mr Morton's surprise in a note to investors. Mr Greenall, who forecast a 13 per cent drop in 2008 profits at the courier business, said: "The cyclicality of City Link is clear and this may prove to be much more of an early warning system of the UK for 2008... Indeed, we would go as far as to suggest that this downgrade may prove to be relatively minor in relation to other consumer-related corporates as we move forward."

He added: "Clearly, credibility has been dented on this warning, and investors may choose to ignore any positive commentary."