Rentokil finds right formula to keep the recession at bay: Terence Wilkinson reports on a company that started life in the 1920s as a rat-catcher

QUITE a few companies have styled themselves if not recession- proof then recession-resistant, but subsequently wished they had kept quiet. Rentokil, the environmental services and property care group, is a glowing exception.

While others have fallen by the wayside, Rentokil has maintained its record of 20 per cent earnings growth throughout the economic downturn.

Half-year pre-tax profits out today are expected to show a rise from pounds 42.3m to more than pounds 50m and a 20 per cent dividend rise.

Credit for Rentokil's impressive record must go to Clive Thompson, chief executive. Since he took the helm in 1982, pre-tax profits have risen from pounds 14.2m to pounds 95m in 1991, a compound growth rate of more than 20 per cent, and are likely to top pounds 110m this year.

Joining at the age of 39 from Jeyes, the household fluids company, via Shell and Boots, Mr Thompson embarked on a strategy of expansion by organic growth and a relentless series of more than 100 acquisitions.

The latest was the pounds 26.2m purchase of Calmic, the hygiene service company, from Wellcome in 1990. Like all the others it was financed without recourse to shareholders or to the bank manager and quickly contributed pounds 3.5m to group profits in 1991.

Over the past 10 years Rentokil's stock market worth has risen from about pounds 100m to pounds 1.43bn, qualifying it to enter the FT-SE 100 index of leading UK companies last summer. It is now one of the top-rated shares on the London Stock Exchange alongside Glaxo and Wellcome and ahead of J Sainsbury and Reuters.

This must be especially gratifying for Sophus Berendsen, the Danish company that invested pounds 2,000 in the 1920s to launch British Ratin, as Rentokil was then called. Its 55.65 per cent stake is now worth pounds 796m.

In the course of the company's expansion programme under Mr Thompson, Rentokil has branched out from its rat- catching origins into sophisticated pest control, hygiene, medical and healthcare services, water and ventilation, office cleaning, office equipment services and tropical plants.

Rentokil can now be found armed with electronic fly killers, disposing of used hypodermic needles and clinical waste, servicing lavatories, tackling sick buildings and leasing fax machines.

Environmental services now make up 85 per cent of sales. Their rapid growth is easily offsetting a marked downturn in the UK property services market and timber treatment generally. Expansion has taken Rentokil into more than 40 countries and overseas profits account for more than half the group total.

Today dry rot, woodworm and damp account for only 5 per cent of sales. But Rentokil's past has come to haunt it in the courts. In March it emerged that it had paid pounds 20,000 to the parents of a 16- year-old boy who died after his home was treated for woodworm.

The insecticide, Lindane, has been used by Rentokil since the 1950s and although banned in Sweden has been declared safe by the UK government.

Last month a former Rentokil employee, who claimed that his exposure to another ingredient of pesticides, Pentachlorophenol, had caused a rare form of cancer, was paid pounds 90,000 in an out-of- court settlement.

In neither case did Rentokil admit liability and in the latter case it was annoyed that its insurers settled out of court. But there have been suggestions that a rash of similar claims may follow.

A key feature of Rentokil's remarkable progress has been its ability to increase profit margins. These have grown almost without a break from 14.5 per cent in 1981 to 24.2 per cent in 1991, partly reflecting the move into higher margin environmental work.

This has not always won universal admiration. In 1988 the Monopolies and Mergers Commission insisted that Rentokil provide customers with detailed information about work carried out in industrial and commercial pest control.

A by-product of such high profitability is strong cash flows and a pounds 40.2m bank balance at the end of 1991.

How is it done? 'Our environmental contracts generate predictable rental income. This allows us to plan routes more accurately and generate productivity gains through higher sales densities for each depot,' Mr Thompson said.

It sounds simple but is easier said than done. BET expanded rapidly during the 1980s, under its former chairman and chief executive Nicholas Wills, into a range of services including laundries, workwear and plant hire and staff recruitment. BET's empire nearly fell to pieces but is being knocked back into shape by its new chief executive, John Clark.

Can Rentokil keep up the pace? 'Not for ever,' said Charles Lambert of Smith New Court. 'Adding 20 per cent to a profits base of well over pounds 100m must get harder and harder. We will probably see a much more acquisitive Rentokil to meet that target.'