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Rentokil plunges 20% on profits warning

SHARES IN Rentokil Initial, the pest control and business services group led by Sir Clive Thompson, slumped by a fifth yesterday after the group warned that profits this year would undershoot market expectations by a wide margin.

Sir Clive, known as Mr Twenty Per Cent for his pledge to grow earnings by 20 per cent each year, told shareholders at Rentokil's annual meeting yesterday that profits were only likely to rise by 10 to15 per cent this year. Analysts had been pencilling in profits growth of 15 to 20 per cent.

The shock announcement sent Rentokil shares tumbling by 70.5p to 291p and increased speculation that the group could be forced into another big takeover deal to restore its fortunes. Sir Clive's last major deal was the pounds 2.2bn acquisition of BET in 1996.

Rentokil failed to meet its growth target in 1998 for the first time in 13 years as profits came in at pounds 490m - a rise of 17.6 per cent.

Since the announcement of its preliminary results in early March, Rentokil shares have fallen by 27 per cent and have underperformed the FTSE All- Share index by 32 per cent. Since the start of this year the shares have retreated by 35 per cent.

Sir Clive, who is also president of the Confederation of British Industry, admitted yesterday that he had failed to manage the market's expectations adequately.

"The very fact that I felt the need to make my statement demonstrates the difference between the market's expectations and how we see ourselves performing."

But he said he felt no pressure to mount another blockbuster bid. "We paid pounds 2.2bn for BET, and if the right business came along of a similar size we would look at it.We have the ability and the financial firepower to take on another big business. But we won't allow allow that to burn a hole in our pockets. If it is a choice between achieving short-term growth targets and making a risky acquisition, then I for one would say we should sacrifice the short-term targets."

At the time of Rentokil's 1998 results Sir Clive said: "The board expects further good growth in 1999."

Analysts had been forecasting sales growth this year of 6 to 8 per cent, which would have been sufficient to generate a 15 to 20 per cent increase in profits and earnings per share.

But Sir Clive said that, based on first-quarter trading, sales growth for the year would be below that level, even though revenues were running ahead of last year's pounds 2.9bn. "We felt we needed to inform the market that its expectations were too high," he added.

Since the BET takeover, Rentokil has introduced a number of initiatives to lift revenues, such as improved sales training and management and an upgraded customer database, but turnover has not risen as quickly as had been expected.

Sir Clive said that the average Rentokil customer typically bought between one and two of its services, which range from hygiene and personnel services, to pest control, property and transport.

The company's long-term target is to get the average customer to buy between five and eight Rentokil services.

Analysts had been pencilling in profits this year of around pounds 580m. The forecasts are now for a 12 per cent increase in earnings, producing pre- tax profits of around pounds 550m in 1999.