Rentokil Initial PLC's (LSE:RTO) first-half numbers were better than the share-price reaction suggested, according to analysts, as investors focused on weakening momentum in its crucial North American pest-control business.
The shares fell 19.5% to 356.8p even though adjusted pre-tax profit of $459 million beat consensus by 4%. Adjusted operating profit was 2% ahead of forecasts at $556 million, while the 15.5% margin also exceeded expectations.
Yet North American pest-control growth slowed to 2.4% in the second quarter from 2.8% in the first. Rentokil also reported "some weakness" in residential customer leads towards the end of June and into July.
This echoed a recent warning from US rival Rollins and raised questions about growth during the second half.
Jefferies said the weaker lead flow "potentially points to a more challenging outlook", although Rentokil maintained its forecast for full-year profit to meet market expectations.
There was another complication. New chief executive Mike Duffy retired the target for North America's adjusted operating margin to reach 20% in 2027. Savings will instead be reinvested to increase sales volumes.
Broker Stifel nevertheless highlighted that North American residential revenue grew strongly across the first half, adding that the contrast with weakness recently reported by US rival Rollins was "particularly notable".
North American organic revenue increased 3.7%, while the adjusted operating margin rose by one percentage point to 17.9%. Customer retention improved to 80.7% and employee retention reached 82.7%.
Stifel also pointed to progress on Rentokil's cost-cutting programme. The group delivered $45 million of gross savings and $28 million after reinvestment during the half. Its annualised savings run rate has reached around $90 million.
The broker said Duffy's self-help strategy would focus on customers, sales execution and simplifying the portfolio around faster-growing markets. It also expects full-year profit forecasts to remain broadly unchanged.
While analysts at Jefferies were more concerned about the weaker customer leads and potentially more challenging second half, they noted that adjusted pre-tax profit beat consensus by 4% and kept a 'buy' rating and 550p price target for the shares.
Stifel retained its 'hold' recommendation and 460p target, arguing that Rentokil's valuation fairly reflected near-term trading trends.
