Outlook: Sir Clive rats on Mr Twenty Per Cent

Click to follow
The Independent Online
SIR CLIVE THOMPSON has boldly gone where the share price has been telling him to for the last three months and formally abandoned Rentokil Initial's commitment to grow earnings by 20 per cent a year. In its place is a new gramatically-challenged objective "to substantially outperform" the support services sector over the next five years.

In truth, the Mr Twenty Per Cent tag had become something of an albatross around Sir Clive's neck. Ratcatching, potted plants and roller towels are not the businesses they used to be. Throw in a low inflation environment and it is a minor miracle that Rentokil Initial was able to make the 10 per cent returns it has been achieving of late.

Missing the target inevitably punished not just the share price but also the executive remuneration schemes. Sir Clive can get around that by asking the non-execs to devise a new bonus structure to match the new objective. But he still has his work cut out to persuade investors that Rentokil has not run out of steam as a growth stock.

A lot will depend on just how substantially Rentokil will be required to outperform its comparator stocks. With the exception of a few shooting stars like Serco, the support services sector does not exactly command a stratospheric rating.

Along with the new objective comes a new corporate strategy to concentrate on Rentokil's core activities. Although the list of what Sir Clive regards as "core" looks achingly long, it disguises a plan to dispose of businesses accounting for a quarter of turnover. As a signal that this is New Rentokil Initial, the businesses for disposal include timber preserving, which is where Rentokil and Sir Clive first came in 17 years ago.

But the big problem for Rentokil remains the lack of top line growth. In the first half the year, sales grew by a measly 2.5 per cent. Sir Clive believes he will crack this in the autumn with the launch of a new databank marketing programme. There is no rocket science involved here. Rather it involves selling more products to the existing customer base. It sounds simple, which rather begs the question of why Rentokil did not introduce it earlier. But as the banks will testify, cross-selling is not as easy as it sounds.

The alternative, of course, is to buy growth with a bumper acquisition. Sir Clive has at least pounds 1bn to spare but has not found the right deal. Yet.

Pension fund puzzler

WHEN GORDON Brown scrapped the entitlement of pensions funds to claim a 20 per cent tax credit on dividends in his first budget in July 1997 there were howls of protest from the industry. Two years on the pain of that pounds 3bn smash-and-grab raid on our pensions pot seems to have dissipated with remarkable ease. With the acquiesence of the entire auditing and actuarial profession, the majority of the UK's top companies have simply magicked away the ACT tax change shortfall by adopting more optimistic projections of what their funds are worth. That at least is what actuarial consultants Lane Clark & Peacock have gleaned from their survey of the annual reports of Britain's top companies.

Should we be worried? As always with these kind of questions, the answer is yes and no. Mr Brown justified his raid on the basis that investment returns have actually outstripped the conservative actuarial assumptions by miles. So he can hardly complain if the corporate sector responds by tweaking their investment assumptions so that the hole thereby created disappears. Provided investment returns hold up, nobody will get hurt. But actuaries are cautious for a reason and sometimes their pessimism turns out to be justified.

The pain being felt by those pensioners who were not lucky enough to have the foresight to opt for a guaranteed annuities policy is well documented. The risk of running funds closer to the wire is that at some point, the market will collapse, and someone, most probably the employees will end up paying the price.

This is not the only disturbing aspect of yesterday's report. At least two major companies AstraZeneca and Vodafone have pension schemes that are seriously underfunded., according to the actuaries. The precise reasons are fuzzy. But at some point those deficits will have to be made good either at the expense of company profits or more likely employee benefits. The pension funds of Britain's biggest companies represents large pools of money which by accounting convention are treated as being part of the companies that fund them but in reality are funds held in trust for future generations of pensioners. The fact that reputable companies are boosting profits either by tolerating underfunding or conversely by allocating pension fund surpluses to their profit and loss account is something that should worry shareholders as much as it should pension fund members. An overhaul of the accounting treatment of pension funds so that companies have to come clean about what exactly they are doing is in train.

Of course, any criticism of the current pension arrangements has to be tempered by the realisation that in most respects, Britain is light years ahead of most of its European partners in providing for the pensions timebomb. But that is no reason for complacency. Having put pensions provision so high on its list of priorities, the Government is in an ideal position to crack the whip. Unfortunately, having himself raided Britain's pension funds, Mr Brown is in a poor position to criticise others who do the same.

A message from MPC Ltd

PICTURE THE scene. A mobile phone company (let's call it Orange) wants to take over a state-of the art microchip plant in the north east of England, opened only two years ago by the Queen at a cost of pounds 1bn, and turn it into a call centre.

This is an example of what is known as the two-speed economy. Manufacturing on its back. Services roaring. The call centre will need some debt funding so what about interest rates? Until recently traders were looking at rates of 7.5 per cent in a year's time. Who better to turn to than MPC Ltd, a forecasting unit made up of nine of the UK's top economists. At least they will supply a straight answer.

Er, yes, and no. The quick answer is that rates are staying on hold over the summer and probably the rest of the year. But beyond that, the picture is less clear.

One group is very aware of the problems faced by Northern businesses and is anxious not to stifle new investment such as this for the sake of controlling confined hot spots in the southern housing market. What's more, some lenders have not even passed on all of the most recent cuts so real monetary policy is already relatively tight.

Unfortunately another group feels rates might have to go up. These house price rises can't be dismissed especially if the beneficiaries start to realise some of their equity to fund a spending binge. If some Northern jobs have to be lost - or never created - in order to ensure inflation hits target two years' hence, then so be it.

Luckily a third group believes a move in rates either way would be damaging and persuades both extremes to keep rates where they are. MPC Ltd hopes this advice was of some help.

Comments