There is something rather Ghostbusters-like about Rentokil Initial: its men and women turning up at scenes of domestic and commercial chaos equipped with the latest hi-tech garb and scientific kit and with a stated mission of ridding the world of pests. Except that in its case it is not ghouls and phantoms, but fleas, flies, moths and termites. And, of course, rats.
Rentokil, as it then was, was founded in 1925 by a professor at Imperial College London who developed a treatment for ridding the Palace of Westminster of death watch beetles. It listed in 1969 and became Rentokil Initial after its hostile takeover of a larger rival, BET, which owned the Initial laundry and washroom services company.
With mergers and acquisitions central to its strategy, the group has become one of the world’s biggest pest control companies and has a division that is a world leader in providing hygiene services as well as an arm that carries out landscaping, damp proofing and plant care.
Its history has not been without incident, including a phantom takeover bid in 2005 by the Irish businessman Sir Gerry Robinson, a contentious subsequent private equity-like incentive scheme for directors put in charge of a turnaround plan, and its ill-fated ownership of the loss-making City Link parcels delivery business, sold five years ago for £1 to Jon Moulton’s Better Capital and later to collapse.
The modern Rentokil Initial is an altogether more efficient beast, however. It operates in 90 countries, generating close to 40 per cent of its revenues in North America, where it is the third-biggest player, and only about 10 per cent from Britain.
About two thirds of its earnings come from the pest control division, where its service teams operate as contractors as well as one-off emergency call-out providers, with hygiene and property and plant care accounting for the remainder.
It also vacuums up businesses at a good clip, often small family owned operators in North America. It spent £117.3 million buying 23 companies in the first half of last year, plus a further 16 for an undisclosed sum during the third quarter, as part of a planned programme to spend between £200 million and £250 million on deals during the full year.
The dynamics of Rentokil Initial’s market look attractive. Pest control is an $18 billion market and is forecast to grow at a compound annual rate of about 5 per cent until 2023. On the face of it, it would also appear to be insulated from economic cycles. Businesses and individuals will need to get rid of their unwanted nasties, not to mention fill up their soap and toilet-roll dispensers, irrespective of the commercial state of the nation.
The weather, though, is an influential factor. Sweltering heat acts as a breeding ground for bugs, while cold and frosty weather dampen their ability to spread.
There are other headaches. The competition watchdog is threatening to block its takeover of Cannon Hygiene, the UK’s third-largest supplier of washroom services, on the grounds that it could push up prices for customers.
This is a business with just under £80 million in annual revenues against Rentokil Initial’s more than £2 billion so it could move on uninterrupted if the acquisition fails.
For investors, the amount of takeover activity makes for a complicated set of accounts, though the group is helpful in this, always stripping out its organic from its acquisition-linked revenues, which grew by a respective 4.1 per cent and 7.7 per cent during the third quarter.
The shares are less compelling. Up 5¼p to 354¼p, they trade at a historical 9.5 times earnings but offer a yield of only 1.1 per cent. Reason enough to steer clear.
ADVICE Avoid
WHY A class operator and a leader in its field but the dividend yield is disappointingly low
Essentra
By its own admission, Essentra is a turnaround in progress under the watchful eye of its hands-on chief executive, Paul Forman. There have been signs, though, that the fortunes of the packaging company and maker of cigarette filters are on the turn for the good.
The company is the renamed former Filtrona cigarette filters group spun out of the Bunzl distribution group in 2005. A somewhat sprawling business, it makes filters for all of the big tobacco companies but now has two other divisions.
The components division makes a vast array of metal and plastic products from hinges, seals, caps and plugs to electric wires and fasteners. The packaging arm is similarly diverse, making everything from the cartons for lipsticks to the labels on perfume and pill bottles.
Mr Forman was parachuted in two years ago to take charge of a business that had warned on profits three times in 12 months, after problems at the health and personal care packaging arm and difficulties integrating acquisitions.
The new boss set about stabilising the group, putting in place a recovery plan for the loss-making packaging division, creating a strategy of “buy and build” for the high-margin components segment and hiving off the more niche non-core parts of the group into a single separate entity, including speciality tapes and ID card printers, from which it is likely that there will be future sales.
He has also begun to explore “game changers” for the filters arm, including a possible joint venture in China and a move into e-cigarettes and vaping. There have been factory closures in the UK and the US.
Mr Forman has reversed falling revenues and profits and returned the packaging division to underlying growth. He recently said he expected to have margin improvements across the group over the full year. In short, he has created real growth options.
The shares, down nearly 18 per cent since he joined, have not mimicked his progress, largely because the market still frets about the safety of the dividend. That worry feels a little overdone but it is clear that there is plenty to do.
The shares, up 8¾p to 373¼p yesterday, look cheap but they are not for the short term.
ADVICE Buy
WHY It’s not yet finished, but turnaround strategy is working
