Rentokil Initial Plc

Camberley, Surrey-based Rentokil Initial Plc (LON: RTO) is a 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.

On 16^th April 2020, the group is expected to announce its Q1 Trading Update.

Trading Update (as on 25^th March 2020)
The trading of the group was not impacted by the coronavirus outbreak until mid-March. However, COVID-19 has affected countries and markets due to advanced stages of lockdown. Multiple sectors are affected such as hotels, restaurants and catering have been substantially closed due to government and voluntary actions taken to limit the impact of the virus. The company has paused their M&A (Mergers and Acquisitions) programme and has also decided to suspend dividend payments for the time being. Consequently, the final dividend proposed has been.

Financial Highlights (for the year ended 31^st December 2019)

(Source: Presentation, Company Website)

On a Constant exchange rate basis, the company's ongoing revenue increased by 8.6% to £2,644.5 million in FY19 as compared with the previous year and ahead of the medium-term target (5%-8%). The group has delivered strong organic revenue growth of 4.5% (2018: 3.7%). The revenue surged by 9.8% to £2,714.4 million at AER basis, driven by good growth in Pest and Hygiene. In FY19, the ongoing profit growth of 10.5% was ahead of the medium-term target. The company delivered free cash flow of £250.7 million on actual exchange rates at 98.6%, the conversion is considerably above the 90% target. The company has delivered an excellent year with 41 acquisitions generating combined annualised revenues of £137 million for a total consideration of £316.5 million. The full-year dividend per share stood at 5.15 pence, an increase of 15.2% as compared with 2018.

Share Price Performance

Daily Chart as at March-27-2020, before the market closed (Source: Thomson Reuters)

Rentokil Initial Plc shares were trading at GBX 378.0 before the market close (at 9:10 AM GMT) on 27th March 2020 and were down by 5.38% versus the previous day closing price. Stock 52 weeks High and Low are GBX 535.20/GBX 289.20.  The group’s stock is reflecting the lower volatility as against the benchmark index, based on the company’s beta of 0.85.

Guidance for FY2020
The company continue to maintain the medium-term targets of Ongoing Revenue growth of 5% to 8%, Ongoing Operating Profit growth of 10% and Free Cash Flow conversion of 90%. P&L interest costs in 2020 are now expected to be £8 million lower than in 2019.  Share of Profits from Associates in 2020 is anticipated to be ~£10 million lower than the prior year. Including IFRS 16, the capex in the region of £260 million to £270 million.

Key Risks
Failure to mitigate against financial market risks, failure to grow the business profitably in a changing macro-economic environment, and failure to integrate acquisitions and execute disposals from continuing business.

Conclusion
The company performed decently in 2019 with a combination of organic and acquisitive growth.In 2020, the group is confident of delivering further financial and operational progress. While the business initiated FY2020 with decent progress, the continuing uncertainty presented by the coronavirus (COVID-19) outbreak. From this, the company will face a difficultly in Q2 FY20 and potentially beyond. Moreover, the company is trading near its 52-week mid, raising doubts at its upside potential at the current prices.

Based on the headwinds faced by the group, we have given a "WATCH" recommendation at the closing price of GBX 399.50 (as on 26^th March 2020), while we look for any upcoming catalysts in the near term.

Luceco Plc

Luceco Plc (LON: LUCE) is a London, United Kingdom-based manufacturer and distributor of LED lighting products providing a range of brands, including Masterplug, Ross, Luceco, and BG Electrical. Main products comprise of Luxpanel, Epsilon and ambient lighting.

Covid-19 Update
On 24^th March 2020, Luceco released an update on the impact of coronavirus. The group announced that it would delay its final financial statements for the period ending 31st December 2019 as guided by the Financial Reporting Council and the Financial Conduct Authority. The results will not be announced prior than 6th April 2020. The full impact of coronavirus pandemic is still unclear. The group sources its products from China and have a manufacturing facility in Jiaxing. None of the company’s employees is infected by the virus across the globe. In response to the outbreak, facilities were closed and were followed by holidays due to Chinese New Year, which declined the capacity and has been recovered since then. The product supply from its own facility and OEM manufacturers has returned to a normal pace. The COVID-19 doesn’t adversely impact on product sales, and profit is in line with the expectations due to proactive cost control measures. However, the restrictions imposed by the government to contain the spread have impacted the short-term demand across the industry. The group has decent flexibility to respond to the uncertain situation and has taken necessary steps to improve it as well. The company has committed borrowing facilities of GBP 50 million, including a revolving credit facility and invoice financing facility. The group has taken multiple steps to preserve cash position and reduce fixed costs from GBP 5.4 million to GBP 3.5 million every month.

Share Price Performance

Daily Chart as of March 27^th, 2020, before the market close (Source: Thomson Reuters)

Luceco Plc shares were trading at GBX 74.15 at the time of writing before the market close (at 11:58 AM GMT) on 27^th March 2020 and down by 3.45% versus the previous day closing price. Stock's 52 weeks High is GBX 154.00 and Low is GBX 39.00.

Conclusion
The company have made significant development, addressing the problems that the group had faced at the beginning of the financial year 2018 and making good progress in the financial year 2019. The company has successfully improved the competitive situation, improved systems and processes, and expect to make further progress by reducing leverage in the year ahead. The group presently have a decent order book.  With most of the business focused on the UK market, the company is mindful of the macroeconomic uncertainty, including Brexit. The company’s Chinese operation and supply chain have been adversely impacted due to Covid-19 outbreak as it resulted in a decline in the capacity. The demand of the company also declined due to restrictions imposed by the government to contain the spread of the virus.

Based on the above rationale, we recommend investors to keep a “WATCH” on the stock at the current price of GBX 86.28 (as on 27^th March 2020, before the market close at 8:03 AM GMT), while any correction with support from few catalysts needs to be evaluated at a later stage.

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