Rentokil Initial PLC

Rentokil Initial PLC (RTO) is a Camberley, Surrey-headquartered commercial pest control company that seeks to provide services that protect people and enhance lives by offering a complete range of pest control services as well as a range of other specialist services. Approximately 90% of its revenues derived outside of the UK as it operates in 70 countries, operating a multi-local business model, and is the world’s leading commercial hygiene services and commercial pest control services provider. The operations of the group are spread over five geographical regions, namely UK & Rest of World, Europe, North America, Asia, and Pacific.

Trading Update – Q3 2019
                                
(Source: Company Filings)

Revenue of the company rose to £727.2 millionwhile ongoing revenue rose at an annual equivalent rate of 13.6% in the third quarter of the financial year 2019 to £723 million, increasing by 9.8% on the constant exchange rate. The rise in ongoing revenue was bifurcated between growth from acquisitions and organic growth, which was 4.3% and 5.5% respectively. Ongoing revenue in Pest Control grew by 12.3% (5.9% Organic), and ongoing revenue in Protect & Enhance category grew by 4.9%, with a growth of 4.5% on an organic basis. Growth in Pest Control was driven by good growth in Latin American, UK & Rest of World and North American segments during the period, with both Growth and Emerging markets delivering good performances, and ongoing revenue in Protect & Enhance reflected an improved performance from the UK Property Care business and a good performance from both France Workwear and Ambius.

Financial Highlights (H1 2019, in £m)
                            
(Source: Company Filings)

Due to the growth in all main business categories and regions, revenue surged by 10.4% to £1,298.9 million as compared with the previous year same period data, while on the annual equivalent rate basis, the ongoing revenue increased by 10.7% to £1,289.9 million as compared with the corresponding period of the last year. Operating profit stood at £125.5 million, an increase of 15.4% on AER basis against the same period in 2018, with a growth of 14.6% on the constant exchange rate, while ongoing operating profit was up by 15.4% on AER basis and 11.6% on a CER basis to £152.1 million. Profit before tax was £113.8 million, an increase of 3.7% on AER basis and 3.2% on CER basis, while adjusted profit before tax increased by 13.7% on AER basis to £141.6 million as compared with the corresponding period of the last year, and 124% on CER basis. Earnings per share stood at 4.75 pence, which reflected the growth of 1.3% on AER basis and 0.7% on CER basis, while adjusted earnings per share climbed by 14% to 5.99 pence, delivering a growth rate of 12.9% on CER basis. Free cash flow stood at £95.9 million, an increase of £22.9 million, while interim dividend per share increased by 15.2% to 1.51 pence against the corresponding period of the last year.

Share Price Commentary

Daily Chart as at 18-October-19, before the market closed (Source: Thomson Reuters)

On 18 October 2019, at the time of writing (before the market closed, GMT 11:45 am), RTO shares were trading at GBX 447, down by 1.32% against the previous day’s closing price. Stock's 52 weeks High and Low are GBX 470.70/GBX 280.00. The company's stock beta was 0.86, reflecting less volatility as compared to the benchmark index. Total outstanding market capitalisation was around GBP 8.34 billion, with a dividend yield of 1.03%.

Conclusion
The company might find it hard to attract frontline colleagues as the company experiences reduced appetite for immigration in the US or geopolitical events like Brexit, which can impact the free movement of people, posing a major threat to the group. Though the company operates a profitable growth model which is assisted through organic growth and M&A, with a positive outlook by management, it is trading near its 52-week high, raising doubts at its upside potential at the current prices. In 2019, P&L and cash interest costs are now projected to be £4 million and is expected to accelerate ongoing operating profit by £3 million.

Based on the headwinds faced by the group, we have given a "WATCH" recommendation at the closing price of GBX 453 (as on 17 October 2019), while we look for any upcoming catalysts in the near term.
 

Senior PLC

Senor PLC (SNR) is a Hertfordshire, United Kingdom-headquartered engineering and manufacturing solutions provider with 32 operating businesses in 14 countries. The company serves original equipment producers in the power & energy, land vehicle, defence and aerospace markets by designing, manufacturing and marketing high-technology components and systems. The operations of the group are differentiated in two operating segments, namely Flexonics and Aerospace. 
Latest Development

The company on 12 June 2019 announced that it had opened a new aerospace manufacturing facility at the Malaysia International Aerospace Centre near Kuala Lumpur, Malaysia, which will include a comprehensive special process and non-destructive testing capabilities. The new facility complements the existing facility of Senior Aerospace UPECA and will provide the capacity to support future growth and increased options for customers.

Financial Highlights (H1 FY 2019, in £m)

(Source: Company Filings)

The half-year 2019 trading was in line with expectations as revenue rose by 10.9% to GBP 580.4m (H1 2018: GBP 523.3m), while on a constant currency basis, revenue was up by GBP 34.7m, which excludedthe favourable exchange rate impact of £22.4m. Both the defence markets and civil aerospace drove the Aerospace Division, and the book to bill ratio was slightly over 1.0x. Reported operating profit rose to GBP 39.2m (H1 2018: GBP 35.8m) and adjusted operating profit increased by GBP 2.8m (6.5%) to GBP 46.2m (H1 2018: GBP 43.4m), while due to volume reduction on mature programmes and the impact of the 737 MAX production rate decrease, adjusted operating margin declined by 30 basis points to 8.0%. Reported profit before tax was GBP 26.5m (H1 2018: GBP 31.4m) and adjusted profit before tax increased by 7% on an IFRS 16 like-for-like basis and rose by 4.4% on a reported basis to GBP 40.7m (H1 2018: GBP 39.0m). Basic earnings per share were 4.81 pence (H1 2018: 5.90 pence), while adjusted EPS rose by 6.5% to 7.84 pence (H1 2018: 7.36 pence). Return on capital employed rose by 20 basis points to 11.7% (H1 2018: 11.5%), and the company approved an interim dividend of 2.28 pence per share (H1 2018: 2.19 pence).

Valuation Methodology
Method:  Price/Cash Flow Approach (NTM)


Share Price Commentary
 
Daily Chart as at 18-October-19, before the market closed (Source: Thomson Reuters)
 
On 18 October 2019, at the time of writing (before the market closed, GMT 12:25 pm), SNR shares were trading at GBX 181.30, up by 3.01 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 283.00/GBX 170.10. The company's stock beta was 0.81, reflecting less volatility as compared to the benchmark index. Total outstanding market capitalisation was around £734.86 million, with a dividend yield of 4.27%.

Conclusion
The company continues to meet current expectations for 2019 despite the ongoing uncertainty around the current geopolitical and macro-economic backdrop and 737 MAX production rate cuts, which would hit margins at its aerospace business as Boeing is one of its top customers. However, the group is financially robust and operates in an attractive end markets, with many industry experts predicting that air traffic growth in excess of 4% per annum over the next 20 years, indicating robust demand for new aircraft. The company continues to focus on cost and efficiencies, and stronger sales on other civil and military programmes helped to mitigate the impact on revenue by the grounding of 737 MAX. While the company is trading near its 52-week low, its latest report for passenger numbers for July indicates strong operations.

Based on the decent prospects of the group, and supported by valuation done using the above method, we have given a "SPECULATIVE BUY" recommendation at the closing price of GBX 176 (as on 17 October 2019) with single digit upside potential, based on 9.50x NTM Price/Cash Flow (approx.) on FY19E Cash Flow per share (approx.).
 
*Peers of the company are Triumph Group Inc, Rolls-Royce Holdings PLC, Meggitt PLC and BAE Systems PLC.
*The “Speculative Buy” recommendation is valid for the current price as covered in the report (as on 18-October-19)
*All forecasted figures and peers have been taken from Thomson Reuters.

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