Rentokil Initial (LON:RTO) has a long track record of growth and is the market leader in the pest control sector. However, it’s struggling to integrate a big US acquisition and is facing sluggish demand in North America, which now accounts for half the group’s revenue.
The resulting profit warnings have seen the stock fall by around 40% since June 2023. However, Rentokil remains a highly respected brand, while growing long-term demand for pest control services seems assured.
I think the business could be worth a closer look at this point, ahead of a potential recovery.
Summary
Pros:
World’s largest pest control business, US market leader
Strong brands and long track record of growth
Shares are trading at a discount to historic valuation and US peers
Cons:
Terminix acquisition is proving difficult and expensive to integrate
Not clear if Rentokil can continue to gain market share given its size and maturity
Net debt is relatively high, adding to finance costs
Profile
About the stock
Rentokil Initial is a pest control and hygiene company operating in markets including the UK, Europe and North America. It’s listed in the Professional & Commercial Services industry group within the Industrials sector.
Although the core operations within the group were founded more than 100 years ago, Rentokil Initial in its current form was created in 1996.
Today the company is a FTSE 100 member with a market cap of £10.2bn and a recent share price of 404p.
Rentokil’s acquisition of US firm Terminix in 2022 has coincided with some weakness in market US demand. Performance has been disappointing over the last couple of years and the StockRanks reflect this.
Rentokil scores well for quality, but is weaker in value and momentum:
About the opportunity
In 2022 Rentokil Initial completed the acquisition of a major US competitor, Terminix Global Holdings, for $6.7bn. The deal was funded with $1.3bn in cash and the remainder in stock. This valued Terminix at a steep 19x 2021 EBITDA, prior to cost savings.
The combined business became the largest US pest control contractor, with North American revenue now accounting for more than half Rentokil’s business.
However,…
