Rentokil shares rise despite integration challenges with Terminix acquisition

Berto
March 7, 2024

Rentokil (LSE: RTO) announced its full-year results today, revealing a 4.9% growth in organic revenue and a 57% increase in adjusted operating profit, largely driven by the acquisition of Terminix.

However, the company also acknowledged challenges in integrating Terminix, leading to lower-than-expected organic growth in North American pest control and a delay in achieving their target operating margin.

Despite these challenges, Rentokil shares initially rose by 14% following the news, likely reflecting the company’s strong overall financial performance and the potential for future cost savings from the Terminix acquisition.

Analysts remain cautious, echoing concerns raised by Charlie Huggins, Manager of the Quality Shares Portfolio at Wealth Club. “Transformational acquisitions always bring significant risk to a business,” Huggins commented. “The Terminix deal is a case in point. While it establishes Rentokil as the leading pest control business in North America and opens up substantial cost savings, there have clearly been teething issues with the integration.”

Huggins pointed to weak new customer acquisition as a major factor behind the lower-than-expected organic growth in North American pest control. “The distraction and complexity of such a large integration has meant the group has taken its eye off the ball,” he said. “This has been compounded by an increasingly competitive market environment.”

While Rentokil increased its cost synergy targets for the Terminix acquisition, the timeline for the integration has been pushed back a year. Additionally, the company will need to reinvest some of those savings in sales and marketing to restore growth in North America.

“Overall, today’s results are unlikely to reassure investors,” Huggins concluded. “Until growth in North America pest control improves, the Terminix acquisition will be treated with a large degree of scepticism.”

Rentokil’s ability to overcome these challenges and reignite growth in North America will be crucial in determining the long-term success of the Terminix acquisition.