Rentokil Initial Plc – An Award Winning Company With Decent Performance

Rentokil Initial Plc (LON: RTO) is a commercial pest control company. The company offers a variety of pest control services and other specialist services that enhance lives and protect people.

Trading Update for Q1 FY2020 with Revenue Growth

(Source: Quarterly Report, Company Website)
 
The Group has made a decent start to the financial year 2020, with growth in ongoing revenue by 7.2 per cent and improved ongoing operating profit for the three months period ending 31^st March 2020. Including in the key North America region, the group net operating margins increased in line with management anticipations. As per the first quarter norms, the cash collections were broadly in line. The ongoing revenue increased from Hygiene business, Pest Control business and Protect and Enhance business by 4.6 per cent, 9.3 per cent and 1.9 per cent, respectively, in Q1 FY2020. On the first 10 weeks, the group did not witness any material impact on the performance, butin the last two weeks of March, operations were impacted materially.

The Ongoing Revenue from overall business increased by 4.4 per cent in March 2020 against the prior year. In March 2020, the revenue from Hygiene business and Pest Control business increased by 2.6 per cent and 6.6 per cent, respectively, while revenue from Protect & Enhance business declined by 2.3 per cent. Due to imposed lockdown for several weeks resulted in a decline in revenue from all regions geographically. The company has a cash balance of GBP 1.2 billion with net debt to EBITDA covenant of 3.5:1, which can be increased to 4.0x in some circumstances and launched specialist disinfection services globally. It has taken measures to reduce costs, boost liquidity, and conserve cash, with reducing salaries, suspending the M&A programme, suspending all discretionary capex, withdrawing the dividend, and reducing the cash tax spend.

Share Price Performance

Daily Chart as of June 5^th, 2020, after the market close (Source: Refinitiv,Thomson Reuters)

Rentokil Initial Plc shares closed at GBX 483.40 at the time of writing after the market close on 5^th June 2020. Stock's 52 weeks High is GBX 535.20 and Low is GBX 289.20.

From the technical standpoint, its shares were trading below its short-term support level of 20-day simple moving average prices, which reflects a downtrend in the stock and carrying the potential to move down further.

Valuation Methodology

*Peers: IWG Plc, Experian Plc, Compass Group Plc, Bunzl Plc and Ferguson Plc.

Risk Assessment
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. While the business initiated FY2020 with decent progress, the continuing uncertainty presented by the coronavirus (COVID-19) outbreak.

Conclusion
The environment in which the company operates is full of uncertainty, and it expects the greater impact on second-quarter performance as compared to the Q1 of the financial year 2020, due to increased restrictions in several countries globally. The group’s operations in South Korea, Hong Kong and China are returning to normal and working at full capacity. In the financial year 2019, the company performed decently and achieved growth organically and through acquisitions. From this scenario, the company will face difficulty in Q2 FY20 and potentially beyond. Moreover, the company is trading near its 52-week high, 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 483.40 (as on 5^th June 2020), while we look for any upcoming catalysts in the near term.

Stobart Group Ltd - Delivering Growth with a Portfolio of Infrastructure Assets and Investments

Stobart Group Ltd (LON: STOB) is involved in the industrial support services business. Its areas of operations are categorised into segments like Energy, Rail & Civil, Aviation, Investment and Infrastructure. 

Financial Highlights – Strong Revenue Growth in the Financial Year 2020 (29^th February 2020)

(Source: Annual Report, Company Website)
 
For the financial year ending 29^th February 2020, driven by an increase in the revenue from Aviation and Energy business, the revenue increased by 15.9 per cent to GBP 170,175 thousand as against GBP 146,889 thousand in FY2019. The underlying EBITDA stood at GBP 16,042 thousand in the financial year 2020 versus an underlying EBITDA of GBP 10,828 thousand in FY2019, reflecting an increase of 48.2 per cent for the period. The group reported LBITDA (loss before interest, tax, depreciation and amortization) of GBP 13,178 thousand in the financial year 2020. Due to an increase in depreciation and amortisation expenses for the period, the group reported an operating loss of GBP 145,566 thousand in FY2020 versus an operating loss of GBP 34,703 thousand in FY2019. The loss for the year stood at GBP 137,895 thousand in FY2020 versus a loss for the year of GBP 58,179 thousand in FY2019. The basic and diluted loss per share of 37.39 pence in FY2020 versus a basic and diluted loss per share of GBP 16.64 pence in FY2019.
 
Share Price Performance
 

Daily Chart as of June 5^th, 2020, after the market close (Source: Refinitiv,Thomson Reuters)

Stobart Group Ltd shares closed at GBX 47.45 at the time of writing after the market close on 5^th June 2020. Stock's 52 weeks High is GBX 137.80 and Low is GBX 27.42.

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Growth Catalysts
Stobart Energy is well-positioned to yield higher margins in future, and the Company has a robust supply chain in place along with long term reliable contracts, which should enhance the value of assets with medium and long-term opportunities.

Conclusion
The Company has shown a decline in financial performance in the financial year 2020. The top-line performance has improved for the period, while bottom-line performance declined, and profitability remained in the negative zone for the period. The group’s revenue from its core operations increased for the period and with an increase in the adjusted EBITDA for the period. STOB operations were impacted by the impact of covid-19 and imposed lockdown to contain the spread of the virus, but the group has taken steps to preserve cash and reduce costs to tackle the uncertain time.

After the outbreak of COVID-19, the aviation industry has been negatively impacted, and there has been a significant decline in the number of bookings as well, which might also impact the performance of STOB in the short-term. However, the group has been operating energy and aviation assets with substantial underlying value.

Over the 5 years (FY15 – FY20), the company’s revenue surged from GBP 116.6 million in FY15 to GBP 170.18 million in FY20. Compounded annual growth rate (CAGR) stood at 7.86 per cent.

Based on the above rationale, we have given a “Speculative Buy” recommendation at the closing price of GBX 47.45 (as on 5^th June 2020).
 
*All forecasted figures and Peer information have been taken fromRefinitiv, Thomson Reuters.
*The “Speculative Buy” recommendation is valid for the current price as covered in the report as on 8^th June 2020.

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