Morning View - Jan 28 2020
Premier Oil plc - BUY: Sales desk presentation: checking in on a newlyde-risked Premier | Urban&Civic plc - BUY: Southeastern power houses | Rentokil Initial plc - BUY: A model for enduring value creation | Micro Focus International plc - BUY: Micro Focus “Got brass in pocket” | UDG Healthcare plc - BUY: UDG guidance in line with expectations at 7-9% for FY20 | Intu Properties plc - SELL: Intu Asturias sale reduces LTV by 1%
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28 Jan 20
Rentokil continues to shine
Another robust quarter by Rentokil, as the healthy Pest control business continued to be supported by flourishing Hygiene solutions. On the back of a strong ytd performance, its full-year revenue growth targets (on both organic and CER basis) look easily achievable. We will revise our estimates slightly upwards.
21 Oct 19
Positive momentum continues
A strong all-round H1 19 performance from Rentokil, driven by contributions came from all regions and core businesses – the accelerated top-line growth in hygiene was quite positive. Management has maintained the full-year guidance. We will revise our estimates upwards, incorporating the strong momentum and value-accretive CWS deal.
05 Aug 19
The strong momentum continues in Q1
A strong set of Q1 results from Rentokil. The top-line was led by a sound organic performance (a resilient Pest Control business and improved Hygiene proposition) and the continued M&A activity by the company. The strong momentum should continue throughout the year. We will tweak our estimates slightly but the stock recommendation might remain unchanged.
19 Apr 19
FY18 ends on a strong note
Rentokil reported strong FY18 results, surpassing its annual targets of revenue, profitability and free cash flow conversion. All the regions clocked profitable growth, including France which rebounded after a few years. The company seems all set to continue the M&A spree in FY19, across the pest control and hygiene business globally. We will revise our estimates upwards.
01 Mar 19
Better than expected Q3
The company surpassed our estimates as well as market consensus in Q3. Pest control remained the star performer, once again supported by the Hygiene business, whereas Protect and Enhance continued to drag. Despite reporting a strong quarter for the North America Pest Control business, the company needs to do more to meet its 2020 revenue target. In the UK, CMA announced its provisional finding against the Cannon acquisition. We have revised our estimates slightly upwards. No change in the stock recommendation.
23 Oct 18
Weakening pest control services
The company reported its Q2 results below our estimates, primarily led by the continuous slowing of the pest control division, partially offset by the hygiene division. In the Protect & Enhance segment, France reported an uptick in its workwear business, where the UK property business continues to struggle. Moving forward, the company’s £1.5bn revenue and 18% operating margin target (by FY20) for North America looks daunting. We have revised our estimates slightly. No change in the stock recommendation.
07 Aug 18
Q1 growth - downplayed by natural forces
Rentokil reported a Q1 18 trading update which was below our estimate as well as the market consensus. Q1 performance was downplayed by natural forces, such as: 1) the negative impact of last September’s hurricane in Puerto Rico (~0.5ppt), and 2) unseasonably cold weather in the US in the month of March. Segment-wise, both Pest Control and Hygiene recorded positive growth, marginally offset by a sluggish Protect & Enhance segment (which again turned negative). We will tweak our estimates slightly. No change in our stock recommendation.
24 Apr 18
Story behind robust FY17 results
Even-though Rentokil reported upbeat full-year (FY17) results, on a quarterly basis both Pest Control and Hygiene businesses (forming the centrepiece of management’s ‘The Right Way’ strategy) registered the weakest growth in past four quarters. Although, the entry of Terminix in the US commercial pest control market poses a threat to Rentokil’s biggest revenue-generating region, we believe that the fragmented nature of the market will provide enough space for both the companies to grow without hurting each other.
28 Mar 18
Temporary softness in organic growth; acquisitive growth to lead the pack
Rentokil reported mixed results in the Q3 FY17 trading update (organic growth was weak but acquisitive growth surpassed our expectations). All revenue numbers are on an organic basis unless specified otherwise. Despite a positive momentum in the core businesses (pest control and hygiene; jointly contributed 83% of ongoing revenue), the ongoing revenue grew by only 3.7% (vs. our estimate: 5.0%). This was largely due to ongoing market weakness in the UK property care business, resulting in a 1.7% revenue decline in the Protect & Enhance segment (contributed c.17% of ongoing revenue). Pest control clocked 5.6% growth (vs. Q2: +7.4% and Q1: +5.6%), once again riding on the consumer demand in North America. The Hygiene business also continued with its growth momentum (Q3: +2.6% vs. Q2: +2.9% and Q1: +3.1%) during the quarter. The company acquired six businesses in Q3 (Pest Control: 5, Hygiene: 1), with combined annual revenues of £4m, primarily in Emerging and Growth markets. On a ytd basis, Rentokil acquired 34 businesses (Pest Control: 26, Hygiene: 7) with a combined total revenue of £184m. Management has already surpassed its earlier capex guidance and expects to continue its shopping spree going forward.
07 Nov 17
Good start to FY17; M&A activity to drive future growth
Rentokil reported Q1 FY17 trading numbers ahead of our estimates. Organic revenue increased by 3.5% (vs FY16: +3.0%, our estimate: +4.2%; excludes the businesses transferred to the Haniel JV), on the back of strong growth in the Pest control and Hygiene business (+5.6% and +3.1, respectively; jointly contributing c.75% of group revenue). The company once again clocked a healthy performance in the major operating regions (North America, Latin America, the UK and APAC), while France remained broadly flat yoy. Reported revenue was up 23.8% (vs our estimate: +12.9%), led by a 6.9% positive scope impact and FX tailwinds (+13.8% yoy; depreciation of GBP vs USD and EUR). During the quarter, the company acquired 12 businesses (ten in Pest Control and one each in Hygiene and Property Care; annualised revenue of £101.7m), principally in the Emerging and Growth markets.
08 May 17
Core business propels growth momentum again
Rentokil reported Q3 FY16 results slightly ahead of our estimates as well as market consensus. The lfl revenue increased by 3.1% (our estimate: +2.0%), once again driven by the Pest Control (+5.9% vs our estimate: +5%) and the Hygiene businesses (+3.2% vs our estimate: +2%). All operating regions registered strong organic revenue growth except for France and the Benelux, which continued to suffer due to challenging macro-economic conditions and a sluggish Workwear business. Total reported revenue was up 33.1%, driven by a positive scope impact (13.3% yoy) and FX tailwinds (16.5% yoy; largely due to the depreciation of GBP vs USD and EUR). The company acquired 13 businesses (annualised revenue of £88m) in the Pest Control and Hygiene businesses (33 acquisitions in the current financial year with combined annualised revenue of £109m). Management has kept full-year guidance unchanged.
15 Nov 16
Pest control and digital leadership to propel future growth
Rentokil reported H1 FY16 results slightly ahead of our estimates. The lfl revenue increased by 2.5% (vs H1 15: +1.9%; our estimate: +0.7%), driven by a better performance across all business segments. The Pest control business grew by 5.5% on an organic basis (vs H1 15: 4.8%; our estimate: +4.5%; accounts for c.50% of the group’s revenue), on the back of strong performance across all geographies, especially North America (H1 16: +4.7% vs H1 15: +2.9%). Despite ongoing challenges in the France and Benelux region, the lfl sales growth improved in the Hygiene (H1 16: +2.5%, FY15: +2.3%; our estimate: +1%) and Workwear business (H1 16: -1.8%, FY15: -3.2%, our estimate: -5%). FX tailwinds (+4.8% yoy; reflecting weaker GBP vs EUR and USD) and scope impact (+8.1%; 20 acquisitions globally) led the total revenue growth to 15.4% (vs H1 15: +0.1%; our estimate: +17.2%). Although the operating margin improved in North America (+180bp yoy; due to the leverage impact and Steritech synergies), it remained unchanged for the company at 11.6%, largely due to ongoing pricing pressures in the European Workwear and Hygiene business. In FY16, the company increased the interim dividend to 0.99p per share (+13.8% yoy). Management has revised the FY16 M&A capex guidance upwards to £70-80m (vs £50m earlier) and expects a favourable FX impact of c.£26m on FY16 operating profit due to GBP depreciation.
10 Aug 16
Robust growth in North America; favourable currency will mitigate Brexit impact
Rentokil reported Q1 16 trading update ahead of our estimates. The organic revenue increased by 2.8% (Q4 15: 1.4%, Q3 15: +1.4%, H1 15: 1.9% and our estimate: +1%), once again driven by pest control (+6.4% vs our estimate: +4%) and the hygiene business (+2.3% vs our estimate: +1.5%). The reported revenue surged by 13.9% (Q3 15: +0.3%, H1 15: +0.9% vs our estimate: +13%) on the back of FX tailwinds (+2.1%) and positive scope effect (+9% yoy; twelve acquisitions during the quarter).
11 Jul 16
Workwear holds back inorganic momentum
Rentokil posted its FY15 results, which were broadly in line with our estimates, clocking the ongoing revenue growth of 6.5% (under constant currency; +7.7% in H2). Growth was once again driven by Pest Control (+13.1% yoy; 4.6% organic) and the Hygiene business (+2.6% yoy; +2.3% organic) as Workwear (-3.2% yoy) remained insipid. Consequently, unfavourable FX dragged down the revenue growth to 2.1% at AER (£1,759m; organic: 1.8%). The underlying operating margin slipped 90bp to 11.6%, whereas EPS came in at 6.83p (vs our estimate of 7.12p). 2015 turned out to be an exceptional year from an acquisition perspective, with Rentokil shelling out c. £370m for 23 deals during the year (21 in Pest Control), resulting in £158m of annualised revenue. The company has further earmarked £50m for acquisitive growth in FY16. Despite difficult trading conditions in certain parts of Europe, the company reiterated its organic growth target of 2-3%. The FCF was £146.8m in FY15 (vs our estimate of £164m), management revised the guidance upwards to £110m+ for 2016 and £120m+ for 2017 (vs our estimates of £202m and £213m respectively). The proposed dividend is up 13.1% yoy to 2.93p.
23 Mar 16
Strategy on track; Steritech to mould Q4 FY15
Rentokil maintains guidance in its Q3 trading update which points to continued momentum in North America and the UK Pest control business (9.3% in Q3 vs 9.2% in H1) while growth in the Emerging markets has slowed a bit (+11.1% in Q3 vs 17.5% in H1). Revenue growth from ongoing operations (at constant currency) was 4.8% in Q3 15 and 5.1% in 9M 15 with 3.4% coming from 17 acquisitions totalling annual revenue of approx. £40m. Consequently, the 9M 15 topline (at actual currency rates) came in at £1.3bn. At actual currency rates, the growth for continuing operations stood at 0.3% for Q3 15 and 0.7% for 9M 15. While France continues to be challenging, management reiterated its confidence in clocking FCF of more than £100m (H1: £55m; consensus estimate: £112m and our estimate: £137m).
06 Nov 15
Inorganic boost for North American pest control business
Rentokil announced a $425m (1.5% debt backed) acquisition of Steritech which positions it at #3 in the pest control market in the US as well as Canada. The business has $97m pest control revenue (into National Accounts) along with a complimentary, $53m brand standards auditing business focused on the food industry and a pro-forma EBITA of $15m. Cost synergies are likely to ramp-up from $10m in FY 16 to $18m by FY 17 and a run-rate of $25m by FY 18 from back office/overhead savings, route density and technician rationalisations. Rentokil expects a 12% EBITA return from this acquisition and a material jump in its pest control business margins by 2018. In addition to the above acquisition and seven bolt-ons in pest control in H1 15, the company acquired Chicago-based Anderson Pest Solutions with annual revenue of $21m at the end of August.
04 Sep 15
Pest strength offsets drag from Workwear and euro depreciation
H1 15 revenue at constant FX grew 4.5% to £886.1m bolstered by the strong performance of the Pest Control segment (£367.2m, +9.6%) across all geographies. The appreciation of sterling against the euro dragged down the reported revenue to £855.3m (+0.1%), slightly ahead of the consensus estimate of £846m. The Hygiene business also picked up, growing 2.3% on the back of product launches supporting positive growth in all regions – UK&Ireland: 3.7%, France: 1.3% and Pacific: 3.9%. The underlying EBIT margin broadly held-up at 12% (vs 12.2% in H1 14) at constant currency and at 10% (vs 10.6% in H1 14) at the reported level; the slackness was prominent in the Workwear division with a 90bp fall in margin to 12.5% (vs 13.4% in H1 14) given the continued weakness in France and the Netherlands. Acquisitions were on track, with 12 bolt-ons in Pest Control and two in the Plants division (combined annualised revenues of £21m; £7.1m contribution in H1 15). The flat Linen businesses in Austria and Northern Ireland, part of Workwear segment, were closed during H1 15. Management also announced phase two for its strategic plan, ‘RIGHT WAY’.
31 Jul 15