Rentokil Initial Plc

Rentokil Initial PLC (LON: 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.

Recent News
On 1^st November 2019,Rentokil Initial announced the acquisition of Florida Pest Control.

Trading Update (Q3 2019)

(Source: Quarterly Report, Company Website)
 
Revenue of the company rose to £727.2 million while ongoing revenue rose at an annual equivalent rate of 13.6 per cent in the third quarter of the financial year 2019 to £723 million, up by 9.8 per cent on the constant exchange rate. The rise in ongoing revenue was bifurcated between growth from acquisitions and organic growth, which was 4.3 per cent and 5.5 per cent, respectively. Ongoing revenue in Pest Control grew by 12.3 per cent (5.9 per cent Organic), and ongoing revenue in Protect & Enhance category grew by 4.9 per cent, with a growth of 4.5 per cent 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.

Share Price Performance

Daily Chart as atDecember 10^th, 2019, before the market close (Source: Thomson Reuters)

Rentokil Initial Plc shares were trading at GBX 427.30 at the time of writing before the market close (at 1:23 PM GMT) on 10^th December 2019 and is down by 0.58% versus the previous day closing price. Stock's 52 weeks High is GBX 470.70 and Low is GBX 315.50.The shares of the company have given a negative return of 1.95 per cent in the last quarter. The company’s stock has given investors a negative return of 2.40 per cent in the last month.

Valuation Methodology

*Peers: Serco Group Plc, Aggreko Plc, Pagegroup Plc, Capita Plc and Hays Plc.

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 an organic growth and M&A, with a positive outlook by management. It is trading near 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 are expected to accelerate ongoing operating profit by £3 million.

Based on the headwinds faced by the group and supported by valuation, we have given a "WATCH" recommendation at the current price of GBX 431.60 (as on 10^th December 2019, before the market close at 8:00 AM GMT), while we look for any upcoming catalysts in the near term.

Severn Trent Plc

Severn Trent Plc (LON: SVT) is amongst the 10 largest water and sewerage regulated companies in England and Wales. The company is focused to provide high-quality services to both households and business customers.

Financial Highlights – H1 Financial Year 2020 (30th September 2019, GBP, million)

(Source: Interim Report, Company Website)

In the first half of the financial year 2020, the group’s turnover increased by 3.2 per cent to £910 million against £881.5 million recorded in the first half of FY2019, on account of tariff increase in Regulated Water and Wastewater revenue and growth in business service’s external turnover. Profit before interest and tax declined from £299.1 million in H1 FY2019 to £285.3 million in H1 FY2020. The Profit before taxation was £180.7 million for H1 FY2020 against £203.6 million for H1 FY2019. The profit for the period stood at £146.7 million in the first half of the financial year 2020 as compared to £165.1 million in H1 FY2019. The company’s Basic Earnings per share were 61.7 pence in the first half of the financial year 2020 against 69.8 pence in H1 FY2019. The company’s Diluted Earnings per share were 61.5 pence for H1 FY2020 against 69.7 pence in H1 FY2019.

Share Price Performance
 
Daily Chart as atDecember 10^th, 2019, before the market close (Source: Thomson Reuters)

Severn Trent Plc shares were trading at GBX 2,270 at the time of writing before the market close (at 1:35 PM GMT) on 10^th December 2019 was down by 0.44% versus the previous day closing price. Stock's 52 weeks High is GBX 2,379.00 and Low is GBX 1,757.01.

Valuation Methodology

*Peers: Telecom Plus Plc, United Utilities Group Plc, Pennon Group Plc, SSE Plc and Drax Group Plc.

Conclusion
In the first half of the financial year 2020, the company had shown a decline in financial performance. Although the revenue has increased for the period, while the profitability has declined by the period. The company needs to manage its operating costs more efficiently.

The company operates in a complex regulatory environment and has tendered its future plans to OFWAT (Water Services Regulation Authority ) for 2020 to 2025, but there is no clarity on the outlook till Dec-19. The company’s operations are impacted due to uncertainty created by ongoing Brexit, as it impacts the company’s supply chain. The fluctuations in the interest rate and exchange rate also impact negatively on the financial performance of the company.

Therefore, after considering the recent performance of the company, we have given a “Watch” recommendation at the current price of GBX 2,287 (as on 10^th December 2019, before the market close at 8:00 AM GMT), while we look for any upcoming catalysts in the near term.
 
 
*All forecasted figures and peer information have been taken from Thomson Reuters.

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