First Read Rentokil Initial Plc: Slower growth in Q2, signs of strategic clarity

Research evidence excerpt

First Read Rentokil Initial Plc: Slower growth in Q2, signs of strategic clarity

Forecast returns

Forecast price appreciation 21.8%

Forecast dividend yield 2.3%

Forecast stock return 24.1%

Market return assumption 9.2%

Forecast excess return 14.9%

Company Description

Rentokil is an outsourcing company focused on route-based services in two regions: North

America (c70% of EBITA) and international (c30% of EBITA). It has two main business lines:

pest control (c83% of revenue) and hygiene and wellbeing (c17%). In recent years, growth

and management focus has been skewed towards pest control, where Rentokil is a global

market leader in the commercial segment and the leading player in North America by market

share (where it also operates in the residential and termite segments).

Valuation Method and Risk Statement

We value Rentokil using a 50:50 SOTP/DCF methodology. In our DCF we include £250m p.a.

of M&A spend at 2.2x EV/Sales (faded beyond FY'30 to zero by the terminal year). We assume

terminal growth of 2.0%, terminal margin 17%. We use a WACC of 7.9%. Risks: Rentokil is

pursuing a significant amount of M&A, with the acquisition of Terminix (closed in Oct-22) plus

its ongoing bolt-on programme. This creates risk around consideration for the acquired

businesses, and their subsequent integration (which is heightened in the case of the Terminix

deal given its size and complexity). Rentokil's Pest Control business operates in hazardous

environments and situations, e.g. the use of poisons and fumigants. Non-compliance with

policies and regulations could impact the company's ability to operate and/or inflict

reputational damage. Various environmental risks exist around company sites and activities.