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Up 10% yesterday: what on earth’s going on with the Rentokil Initial share price?

The flag of the United States of America flying in front of the Capitol building
Image source: Getty Images

The Rentokil Initial (LSE: RTO) share price shot up by 10% yesterday. And it’s about the same amount higher over the past year.

That’s quite a stunt for a big FTSE 100 stock at the best of times. But it’s even more remarkable given the terrible market sentiment we’ve endured this week.

So the commercial pest control company must have said something positive to excite the market. And it did.

The good news came with the full-year results report for 2022. The company posted a robust set of figures and a positive outlook.

Chief executive Andy Ransom pointed to organic revenue growth of almost 7% year on year.

But a big part of yesterday’s stock move occurred due to reassurance that the big acquisition of Terminix is going well.

Big in America

Rentokil Initial announced the takeover of the American company in December 2021. And at the time, Ransom said the combination of the two businesses would create the global leader in commercial, residential and termite pest control.

And the enlarged enterprise would have a substantial presence in North America — the world’s largest pest control market.

In yesterday’s report, Ransom said early progress on integration of the acquisition has been excellent. And the company now has increased expectations for total cost-saving synergies, up from around $150m to at least $200m by the end of 2025.

The situation reinforces the directors’ strong conviction in the enlarged company’s financial and strategic opportunities in the years ahead.

And the outlook for 2023 is bullish. The business has been managing cost inflation well by raising its selling prices. And it expects profit margins to actually increase a bit. But on top of that, earnings look set to rise by a mid-teen percentage during 2023.

Looking further ahead, the directors increased their guidance for organic revenue growth in 2025. They now expect to achieve a gain of at least 5% rather than the 4% to 5% previously estimated.

Cash-generating acquisitive growth

But organic growth isn’t the only game in town for Rentokil Initial. In addition, the company made 52 other acquisitions as well as Terminix during 2022. And there’s a robust pipeline of high-quality acquisition opportunities in place for 2023.

Meanwhile, the company’s debts seem to be under control. And there’s an impressive multi-year record of steady growth in revenue, operating cash flow and shareholder dividends.

But all this good stuff comes at a price for investors, as demonstrated in the valuation. The forward-looking earnings multiple is near 24 for 2023. And the anticipated dividend yield is about 1.4%.

That suggests the stock may be up with events. And a high-looking valuation can bring risks for investors. For example, if the business goes ex-growth in the future, any valuation derating may be brutal for the share price.

Nevertheless, this company shows many signs of a growth story in good health. And it may be worth investors’ time to dig in with deeper research now.

The post Up 10% yesterday: what on earth’s going on with the Rentokil Initial share price? appeared first on The Motley Fool UK.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2023