11th Sep 2024 09:21
(Alliance News) - The scale of an earnings warning from Rentokil Initial PLC caught Stifel by surprise, while Goldman Sachs believes fears for the pest control and hygiene firm's North America integration plans may grow.
Wednesday's update is the latest blow for the Crawley, England-based pest control and hygiene firm, which cut guidance in July, and also back in October 2023.
In response, shares in Rentokil fell 18% to 388.44 pence each in London on Wednesday. It was the worst performing stock in the FTSE 100 index, which itself was marginally lower. The stock is down more than a third the past 12 months.
Rentokil said trading in North America in July and August was lower than anticipated while there had been been some modest disruption to organic growth from branch integration.
The firm now expects second half organic revenue growth in North America of around 1%. Rentokil previously had forecast full-year organic revenue in North America between 2% to 4%.
Rentokil said the impact of the revised North America growth expectation on 2024 adjusted operating profit is around GBP20 million.
Full-year 2024 North America adjusted operating profit margin is now anticipated to be around 17.2% and group adjusted operating profit margin to be around 15.5%.
Goldman Sachs put the consensus for Rentokil's group adjusted operating profit margin at 16.8%.
"We expect the news to be taken negatively by the market and believe it creates uncertainty around the progress and execution of the integration programme in North America. Furthermore, given the weakness in organic growth seen since [the third-quarter of 2023], we also believe the company's medium-term targets could be at risk given the negative operating leverage implications from ongoing volume weakness," analysts at Goldman Sachs commented.
Rentokil in October 2022 sealed the acquisition of Terminix for USD6.7 billion. The integration is ongoing.
Rentokil said its sales and service division was expanded to deliver planned growth, but lower than expected sales meant the operation was over-resourced. Increased weekend working to drive additional revenue also resulted in an increase in overtime expenditure. In addition, spend on materials and consumables was higher than expected.
Rentokil said the aggregate impact of these cost items on 2024 adjusted operating profit is anticipated to be around GBP50 million.
The company also flagged an adverse foreign currency hit of GBP10 million, reflecting the strength of sterling against the dollar.
As a result, Rentokil expects 2024 group adjusted profit before tax and amortisation of around GBP700 million.
Analysts at Stifel had been expecting a figure of GBP779 million.
"The scale of the profit warning is surprising. Rentokil struggled for organic momentum in 1H, with greater investment in marketing expected to move the dial in 2H. Clearly this has not happened, and the low organic growth figure is a concern given the full branch integration is not in full swing," the broker commented.
Rentokil said it was taking "decisive action" to mitigate the cost over-runs and continues to believe in the fundamental strength of the North America business.
This would include managing inventory more effectively, managing technician workload and overtime, and moves to "right-size" labour resources.
By Eric Cunha, Alliance News news editor
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