Why rat-catcher Ren­tokil is a stand­out stock in the FTSE 100

In­vestors can sleep soundly at night with this solid growth story

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On the face of it few busi­nesses might seem less at­trac­tive than rat­catch­ing and loo-clean­ing, but few other FTSE firms can boast

Ren­tokil’s (RTO) high op­er­at­ing mar­gins or are world lead­ers in their field.

Thanks to a mix of steady if un­dra­matic or­ganic growth and op­por­tunis­tic bolt-on ac­qui­si­tions, over the last five years Ren­tokil has turned it­self into the global leader in com­mer­cial pest con­trol. At the same time, Ini­tial has grown to be­come the world’s big­gest hy­giene ser­vices busi­ness.

STRONG LOGIC BE­HIND COM­PANY’S STRUC­TURE

There’s a strong logic to hav­ing these busi­nesses un­der one roof. They tend to serve the same cus­tomers in the same ar­eas which means they can share coun­try man­age­ment, ad­min­is­tra­tion, in­fras­truc­ture and tech­nol­ogy, which saves on costs.

Also, both busi­nesses are non-cycli­cal and are grow­ing due to the same big in­dus­try trends, most ob­vi­ously the need to pre­vent the spread of bac­te­ria, germs and disease as pop­u­la­tions grow and more peo­ple live and work in cities.

Ac­cord­ing to UN es­ti­mates, by 2050 nearly 70% of the world’s pop­u­la­tion will live in ur­ban ar­eas com­pared with just over 40% in 1990. Most of that growth is ex­pected to come from Asia and Africa.

The pest con­trol di­vi­sion, which ac­counts for 63% of sales and 68% of op­er­at­ing profit, op­er­ates in an $18bn global mar­ket which is seen grow­ing by 5% a year for the next five years. Ren­tokil’s un­der­ly­ing sales are grow­ing at the same rate but thanks to ac­qui­si­tions to­tal sales growth is much higher (13% in the first half of this year).

On top of this, vec­tor con­trol is a rapidly-grow­ing mar­ket al­ready worth over $3bn glob­ally. This en­tails pre­vent­ing the spread of dis­eases like malaria and dengue fever which are on the rise due to cli­mate change and in­creased travel. Ren­tokil has re­cently bought the lead­ing US vec­tor spe­cial­ist VDA, giv­ing it ac­cess to this key mar­ket.

Mean­while the hy­giene ser­vices arm, which ac­counts for 22% of sales and 23% of op­er­at­ing profit, is a slow­er­growth but equally high-mar­gin busi­ness. Again tar­geted ac­qui­si­tions are pro­pelling growth with two big deals an­nounced in the last year, CWS in Italy and Can­non in the UK.

WHERE DOES THE REST OF ITS MONEY COME FROM?

The re­main­ing 15% of sales and 9% of op­er­at­ing profit come from wa­ter­ing of­fice plants, sup­ply­ing work-wear and treat­ing dry rot, col­lec­tively ti­tled Pro­tect & En­hance. While these busi­nesses ben­e­fit from the group’s global foot­print, they are non-core and some as­sets have al­ready been sold or put into joint ven­tures.

The UK prop­erty-care busi­ness, which treats dry rot and wood­worm, has been

strug­gling for the past year as the hous­ing mar­ket has slowed and rev­enues are just 1% of the group to­tal (£11m out of £1.2bn in the first half).

With lit­tle sign of an up­turn we wouldn’t be sur­prised if Ren­tokil sold this unit to a more nat­u­ral owner like Home­serve

(HSV) and re-in­vested in its higher-mar­gin core busi­nesses, as it has with Can­non Hy­giene and more re­cently with the pur­chase of Mi­tie’s (MTO) pest­con­trol busi­ness.

AC­QUI­SI­TIONS ARE KEY TO EX­PAN­SION PLANS

Ac­qui­si­tions are an im­por­tant part of Ren­tokil’s growth strat­egy. Both pest con­trol and hy­giene are frag­mented mar­kets with hun­dreds of small com­peti­tors ripe for con­sol­i­dat­ing into Ren­tokil’s trusted-sup­plier model, and the com­pany is of­ten the ‘buyer of choice’ for smaller firms.

By in­creas­ing scale and den­sity, par­tic­u­larly in ur­ban ar­eas and emerg­ing mar­kets, the com­pany can bet­ter lever­age the ben­e­fits of scale.

An­other part of the growth strat­egy is in­vest­ment in in­no­va­tion, both in terms of prod­ucts and tech­nol­ogy. A third of new or­ders in its pest con­trol arm are for new prod­ucts and the rel­a­tively new on­line portal My Ren­tokil has been a big hit with around 80% of cus­tomers us­ing it to mon­i­tor their prod­ucts and pest ac­tiv­ity.

Un­usual as it may sound, bed bugs are an­other growth op­por­tu­nity. The po­ten­tial mar­ket for a suc­cess­ful ‘smart’ so­lu­tion is huge as there are 17m ho­tel rooms across the globe and tra­di­tional tools for treat­ing the prob­lem are very hit-and-miss. One US ho­tel chain is al­ready pi­lot­ing Ren­tokil’s bed-bug mon­i­tor­ing scheme across 1,000 of its rooms.

IN­VESTORS WARM­ING TO THE SHARES AGAIN

In­vestors have given Ren­tokil some­thing of a cold shoul­der in re­cent months but we note that the shares jumped last week on the news of the Mi­tie deal while those of Mi­tie dropped, which sug­gests that in­vestors are warm­ing to Ren­tokil’s growth story again.

An­a­lysts are more pos­i­tive than neg­a­tive with eight ‘buy’, four ‘hold’ and just two ‘sell’ rat­ings but they haven’t pushed the boat out with their price tar­gets as the 12-month con­sen­sus is just 14% above the cur­rent share price at 370p.

Sales and earn­ings es­ti­mates for this year and next year have been creep­ing up slowly over the sum­mer but again an­a­lysts aren’t overly bullish so it looks as though there is room for more earn­ings up­grades.

Sourse: Ren­tokil

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