Rentokil Initial's North America woes impact shares

Shares of Rentokil Initial (LSE: RTO) took a sharp dive on Thursday, plummeting 15% to 506.20 pence each in early trading, making it the worst FTSE 100 performer. The nosedive came after the pest control and hygiene firm issued a warning regarding its full-year outlook in North America due to challenging market conditions in the region.

In the third quarter, Rentokil reported a remarkable surge in group revenue, climbing 53% year-on-year to £1.38 billion from £901 million. This boost was largely facilitated by strategic acquisitions, notably the $6.7 billion deal with Terminix, finalised around this time last year. Adjusted for currency fluctuations, the revenue spike stood at an impressive 60%.

Rentokil’s performance in different regions varied. In North America, the company experienced sluggish organic revenue growth of 2.2%. Meanwhile, the Europe region, encompassing Latin America but excluding the UK, witnessed a robust growth of 9.5%. The UK & Sub Saharan Africa division saw a respectable organic revenue growth of 5.2%. The Asia, Middle East, North Africa, and Turkey regions displayed an organic growth rate of 8.9%, and in the Pacific division, organic revenue growth stood at 7.6%.

However, it was Rentokil’s North American segment that posed a challenge. The company expressed caution about the uncertain macroeconomic conditions in the region, leading to a slightly lower full-year performance expectation than previously anticipated.

“In North America, we remain mindful of the macroeconomic backdrop. Near-term market uncertainty means that the region’s full-year performance is anticipated to be marginally below our previous expectations,” Rentokil cautioned.

As a response to the challenging market dynamics in North America, Rentokil adjusted its outlook, lowering the expected North America adjusted operating margin range from 19.5% to a new range of 18.5% to 19.0%. However, at the group level, the company maintained its adjusted operating margin guide of 16.5%.

Rentokil remained optimistic about its overall performance for the remainder of 2023. The company stated, “Overall, we expect to achieve good growth in the group in the remainder of 2023. We continue to believe that the benefit of our diversified portfolio and strong H1 performance will enable us to deliver group results broadly in line with current expectations. Our sustained focus on managing inflationary pressures means we remain on track to meet our full-year guidance.”