View from City Road: Rentokil breeds a healthy strain

DESPITE a UK recession and the impact of a sliding dollar on revenues from North America and the Asia-Pacific area, where it makes 30 per cent of its sales, Rentokil has had no trouble meeting its target of 20 per cent pre-tax profits growth in the first half of 1992.

A 20.8 per cent increase in pre-tax profits to pounds 51.1m on a mere 9.7 per cent turnover gain was struck after pounds 2m of currency translation losses, without which the rise would have been 25.5 per cent.

The question now is not whether but for how long Rentokil's chief executive, Clive Thompson, can keep up this metronome-like rate of growth, reflected in a 20.3 per cent rise in the interim dividend to 0.64p a share.

The prime mover in the latest set of figures is continental Europe, accounting for 29 per cent of turnover. The acquisition of Calmic from Wellcome at the end of 1990 brought a useful new slab of customers in Europe to graft on to its infrastructure of depots. Sales grew by 19 per cent but margins widened by 2 percentage points to 23.1 per cent, lifting operating profits by 29.6 per cent. Rentokil sees strong growth here for years to come.

In the UK, which provided 40 per cent of group sales, the main factor behind a 17 per cent increase in profits to pounds 22.2m was, surprisingly, property services, where cost-cutting in the face of the housing slump paid off. The predominant UK environmental service side produced a fairly pedestrian performance by Rentokil's standards, with sales and profits both rising by 12 per cent.

The recession has encouraged economy but also business failures. Terminations rose from 18 per cent to 25 per cent of total contracts. Average contract length has fallen from six years to four.

A sliding dollar reduced profits growth in the Asia-Pacific region and Africa from 26 per cent to 8 per cent while a further strong improvement in North American margins was also depressed in sterling terms as currency translation reduced profits growth from 22 per cent to 2 per cent.

After spending pounds 10m on acquisitions and pounds 17m on capital expenditure, Rentokil's inexorable cash generation left it with net cash balances of pounds 40m and contributed another pounds 1.5m of interest to profits.

Rentokil's apparently simple business has higher barriers to entry than might appear at first sight. A p/e of 19.3 at 147p, assuming pre-tax profits of pounds 114m, is no barrier to further outperformance.

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