Rentokil barely delivers on 20 per cent growth promise

Sir Clive Thompson, chief executive of the fast-growing Rentokil Initial industrial services group, has only just managed to keep his promise to deliver 20 per cent annual earnings growth. The company's latest results, released yesterday, showed that earnings per share advanced by 20.5 per cent last year, but only with the aid of the takeover of arch-rival BET.

Profits in the businesses rose by only 9 per cent in 1996, which Sir Clive attributed to the costs of integrating the two companies and unquantified costs of business lost and savings missed through management's time being diverted to the process of integrating BET.

However, he admitted that even without these distractions earnings growth would have fallen short of the 20 per cent promise - being somewhere between 17 and 19 per cent. Turnover in the enlarged business rose from pounds 874m to pounds 2.4bn, but profits before tax grew by a more sedate 48 per cent to pounds 318m - which is a reflection of the lower operating margins at BET's businesses. The net dividend goes up in line with earnings to 5.06p.

The existing Rentokil operations increased turnover by 15 per cent to pounds 1.01bn and profits by just 9 per cent to pounds 233m.

Group pre-tax profits were in line with expectations and the BET businesses did better than expected, but the poor performance of the original businesses sent the shares down 42.5p to 415.5p.

BET's profit contribution was pounds 84.6m in eight months after charging pounds 31m of interest on the cash element of the cost of buying the company. Its profit margins edged up from 8.2 to 8.7 per cent.

The actual costs of the integration process are included in exceptional costs of pounds 16.4m, which also cover the effect of the stronger pound.

Geographically the acquisition made little difference to the spread of business, although the contributions from North America increased slightly. By sector, hygiene and cleaning remained the biggest single division generating close to 40 per cent of profits from 30 per cent of group turnover.

The acquisition of BET improved the contribution from plant and distribution and personnel services at the expense of pest control, the original core of the Rentokil business 25 years ago. Turnover and profits in that department showed little change last year and it now contributes 20 per cent of profits but less than 10 per cent of turnover.

On prospects, the company is adamant that the setback in the original businesses is temporary and the group is back on course to rebuild margins in the ongoing business and to make further improvements in the BET businesses and to deliver a 20 per cent improvement in earnings in 1997.