7th Nov 2014 13:21
LONDON (Alliance News) - Rentokil Initial PLC shares dropped on Friday after the company said the strength of sterling was having a big impact on its reported results, with third quarter pretax profit pegged back by the effect of currency translation.
The FTSE 250-listed company, which provides services including pest control and facilities management, saw it shares fall 4.6% to 116.5 pence on Friday, after it said pretax profit in in the three months to the end of September rose 16.7% on the year to GBP48.8 million. It said the increase would have been 27% if exchange rates had remained constant.
Based on current exchange rates, Rentokil expects its full year pretax profit to take a GBP17 million hit from the strength of sterling, in line with previous guidance.
Adjusted operating profit was up 4% in the third quarter on a constant currency basis, but sunk 4.1% at actual rates. The group said it saw growth in North America, Pacific and Germany, but this was offset by weaker performance in its French and Benelux businesses.
For the nine months to the end of September, pretax profit is up 28.4%, although it would have been up 42% at constant exchange rates. Revenue fell 3.4% at actual rates, but rose 3.3% on a constant currency basis.
The group said its revenue in the quarter was boosted by a 22.4% rise in its Emerging business and a 6.1% increase for its Growth arm, though this was partially offset by a 0.1% decline in its Protect and Enhance division and a 0.8% fall in its Manage for Value business.
Rentokil Initial Chief Executive Officer Andy Ransom said that while its Pest Control revenue is performing well and it is seeing growth in its Emerging and Growth segments, "challenging trading conditions persist in our European businesses", with the main impact being felt in the hygiene and workwear categories in the Protect & Enhance and Manage for Value segments.
"Profit growth in the quarter continues to reflect the benefit of more efficient businesses and reduced overheads and has been achieved despite the challenging European trading conditions," said Ransom, who added the company expects its performance in the fourth quarter to be in line with the third.
Despite the hit from sterling strength and European weakness, Investec reiterated its Buy rating on Rentokil, saying that though it has slightly cut its pretax profit guidance for the services company, the recovery of the business remains on track.
The broker said the company posted a solid third quarter, but said it has cut its pretax profit forecast for the company by 2.5% owing to the challenging trading conditions it faces in Europe.
But the broker said that in spite of the short-term impact on profitability being reaped by the macroeconomic weakness in Europe, "the Rentokil recovery story remains firmly on track".
Investec said the company's "key operational metrics are moving in the right direction" and said that "though consistent delivery against its strategic objectives, we believe Rentokil can continue to re-rate".
Along with the reiterated Buy recommendation, Investec has a 150 pence price target on the stock.
By Sam Unsted; [email protected]; @SamUAtAlliance
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