Rentokil Faces Turnaround Challenges After 25% Share Price Drop

The stock price of the pest control business has been decreasing recently, but there are indications that the downturn may be coming to an end.​

Strong Pound, Bad News

Rentokil Initial saw its share price drop a couple of weeks ago and then trended lower over subsequent days after providing a trading update warning profits would be £80 million lower this year. The company was facing dual impacts of slower sales in the US, and those sales contributing less to the bottom line due to the relative strength of the pound. Combined, this would lead to the company generating a £20 million loss from its largest sales unit.

While reassuring investors the rest of the business is performing well, the Americas division represents over 68% of the company's operating profit. The main issues identified were overestimating results, spending more on inventory and overtime for staff to meet projected sales not achieved, and generating £50 million in additional costs for the summer period.

Poor Judgment, Market Unease

Rentokil's profit warning resulted in its share price declining by 19%. As summer is the peak season for pest control sales, it will be difficult to regain lost revenue through the cooler, less pest-active winter months. The company had run an extensive and costly advertising campaign featuring its recently acquired Terminix brand, but sales did not meet expectations. This could suggest Rentokil faces challenges in integrating the large American business it has acquired.

One investor that appears to be capitalising on the situation is Trian, led by Nelson Peltz. Trian has been increasing its stake in Rentokil since June. Peltz is an activist investor known for attempting to influence Disney's strategy. Rentokil's shares rose slightly following the announcement that Trian would appoint one of its executives to the board. This indicates Trian may view Rentokil as a target for Peltz's strategy of improving performance at undervalued consumer companies. Trian holds 2.3% of Rentokil, a stake large enough to make it one of the 10 largest shareholders. In a standard statement, Trian said it had contacted Rentokil to discuss enhancing shareholder value but provided no further details or clarification of its intentions.​​

Rento Triangle Breakout Risky

Whilst Rentkil's share price increased recently, it remains at risk of further decreases unless the recently broken triangle is successfully re-broken upwards at 400 pence. If downward movement continues, the price may fall to approximately 300 pence before eventually rising, the measured-move extension for the triangle. However, if buying interest returns and the price surpasses key resistance levels at the triangle's median line of 450 pence and its end of 495 pence, it is more likely the trend will reverse.​

Source: SpreadEx / Rentokil Initial

Key Takeaways

Rentokil recently saw its share price decline due to weaker-than-expected sales and profits in its key American division. Overreliance on the US market, which accounts for over two-thirds of profits, has left the company vulnerable. Questions also remain around management's ability to integrate recent acquisitions like Terminix successfully. Activist investor Trian Partners, now one of Rentokil's top 10 shareholders, may seek improvements after Trian's involvement in the board team suggests the market sees potential.