Stephen Rawlinson
19 April 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 19th April 2017

Rentokil’s update this morning shows a positive picture for trading in the first quarter to end March 2017 with organic revenue growth of 3.1% and growth from acquisitions at 6.9%, all at CER. RTO is busy trading out of dull old Europe and into thriving emerging markets and the US, the prototype/poster child for post Brexit Britain?

Rentokil’s update this morning shows a positive picture for trading in the first quarter to end March 2017 with organic revenue growth of 3.1% and growth from acquisitions at 6.9%, all at CER. Growth in revenue at AER was 24% to £579m. The mid December announcement of the transfer of parts of the workwear and hygiene operations (Germany and Benelux) into a JV with Haniel is on track; excluding those operations boosts the organic growth rate to 3.5%. The geographic pattern of progress was similar to that we have seen in many UK operations, US and Emerging pretty good, UK alright but not great and Europe still struggling a bit though in RTO’s case revenue grew in the period. The overall picture is that Rentokil is performing in line with expectations. More below

Fourth big vote in four years will be enough to confuse the data and create a few fudge factors. In 2014 when the Scottish vote was in all seemed to be going fine, lots of positives ahead. There still are but there are greater uncertainties.  It’s not our job to comment on the Big Picture. But it’s enough to say that the uncertainty provides plenty of valid reasons for consumers and the public sector to avoid decisions and for companies to hold back on investment plans. The outcome of June 8th is uncertain as we all know. So expect the updates for UK biased companies in the next few weeks to be ridded ifs, buts and maybes about trading performance, driven by political events. No prizes for spotting the first UK General Election profit scare!

The stocks that will thrive will be those providing essential services in the UK, which means Mears, which topped the table yesterday with a 0.7% increase and services companies though many have construction arms which confuses the picture. When Mitie has its results out of the way, which is before 8th June we may have more visibility on its potential and it should trade well in the current uncertainty given contract durations. Serco and G4S should see good UK performance but struggled yesterday due to US FX exposure. The contractors performed weakly yesterday, no doubt election inspired projects delays were in investors’ minds. Infrastructure spending promises will be a key feature of the election debate we suspect and that will affect sentiment on the builders.

The main fallers yesterday had US$ exposure so that meant that Wolseley fell 3.2%, Balfours dipped 2.5%, Serco dropped by 2.4% and Rentokil tumbled a little, down 2.2%. In terms of trading prospects nothing altered but sterling’s rise affected expectations about headline earnings. Whether Sterling’s strength was just short covering as uncertainty increased or genuine reappraisal has yet to be seen.

The rise and rise of Rentokil continues. We are told today that the company has bought 12 businesses YTD of which 10 are in pest control and one each in hygiene and property care and that most of the buys are in emerging markets. RTO is busy trading out of dull old Europe and into thriving emerging markets and the US, the prototype for post Brexit Britain? The JV with India’s largest pest control company, announced in March is further evidence of its intentions in terms of geography and markets. The JV is managed by RTO and currently operates nationwide and has revenue of £50m and employs 6,900 people. Rentokil also expanded in Saudi as its JV there acquired the market leader in commercial pest control, Sames.  The market expectation is that the company will achieve 12p of EPS this year and 13.5p next. But those numbers are, of course, subject to FX, which has clearly boosted headline performance in Q1 and will provide a varying effect as the year progresses. The shares closed last night at 248p, down 5p on the day. The rating at 21x 2017 earnings remains high by UK standards but not by that of its main US rival and the emphasis on rapid growth in pest control and emerging markets should aid sentiment today.


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