Rentokil Initial shares plummet on profit warning

Investing.com -- Shares of Rentokil Initial (LON:RTO) dropped on Wednesday after the company issued a profit warning.

At 5:37 am (0937 GMT), Rentokil Initial was trading 17.8% lower at £391.10.

The company has revised its anticipated organic revenue growth in North America for the second half to about 1%. 

This adjustment comes after a disappointing trading performance in July and August, compounded by disruptions related to branch integration. 

The revised growth expectation has had an impact, leading to an estimated reduction of £20 million in FY 24 adjusted operating profit for North America.

The situation is further aggravated by higher costs resulting from over-expansion in sales and service roles. 

“The lack of growth recovery despite additional investment and at an early stage in the branch integration progress will be seen as a concern by the market, we expect,” said analysts at Jefferies in a note. 

To boost revenue during the peak season, Rentokil increased its workforce. However, this expansion resulted in unexpectedly high overtime costs and higher expenses for materials and consumables.

Collectively, these cost overruns are projected to affect the FY 24 group adjusted operating profit by around £50 million.

Additionally, Rentokil faces additional headwinds from foreign currency fluctuations. The strengthening of Sterling against the US Dollar, along with easing hyper-inflation in several markets, is expected to introduce an extra £10 million currency headwind to FY 24 adjusted profit before tax and amortization.

“This is clearly negative news and a further hit to credibility following previous disappointments especially following improved lead indicators at H1, easy comps in H2 and the increase in sales and marketing spend,” said analysts at RBC Capital Markets in a note.

In response to these difficulties, Rentokil Initial is focusing on its "Right Way 2" plan, which is designed to boost revenue growth through enhanced lead flow, improved sales conversion, and better customer retention. 

The company is taking decisive steps to mitigate cost overruns by optimizing inventory management, adjusting technician workloads and overtime, and right-sizing its labor resources in alignment with current opportunities.

Despite these immediate setbacks, Rentokil Initial maintains confidence in the long-term potential of its North American business. 

The company flags structural growth opportunities and the anticipated benefits from the Terminix transaction, though realizing these benefits is taking longer than initially expected.