We came across a bullish thesis on Rentokil Initial plc (RTO) on Substack by Mike MaxDividends Team. In this article, we will summarize the bulls’ thesis on RTO. Rentokil Initial plc (RTO)'s share was trading at $23.89 as of May 5th. RTO’s trailing and forward P/E were 29.65 and 17.24 respectively according to Yahoo Finance.
A pest control service technician spraying insecticide in a residential property.
Rentokil's stock has fallen by 19% since March 2024, largely due to challenges in integrating Terminix, which the company acquired in late 2022. Despite these short-term setbacks, Rentokil maintains its position as the global leader in pest control, a resilient industry characterized by recurring revenues and long-term growth opportunities, especially in the context of continued industry consolidation. The company had originally targeted $200 million in synergies by 2026 through its integration plan, aimed at improving operational efficiency and expanding margins. However, these goals have been disrupted, particularly in North America, which accounts for 60% of Rentokil's revenue. Weaknesses in lead generation and sales execution led to several guidance downgrades and disappointing fiscal year 2024 results, including a modest 2.8% organic revenue growth and a decline in the adjusted operating margin to 15.4%, both falling short of initial targets.
The North American business performed particularly poorly, with organic growth of just 1.5% and a drop in margin from 18.7% to 17.1%. Despite significant investments under the “RIGHT WAY 2” plan, returns have been underwhelming, prompting management to reallocate resources to more promising initiatives for 2025. Adding to the difficulties, leadership turnover has occurred, as Brad Paulsen, the CEO of North America, will depart in April 2025 following a brief tenure, amid speculation of activist pressure from Trian Partners. He will be replaced by interim CEO Alain Moffroid. While sequential improvement was observed in Q4 2024, with growth rising to 2.3% compared to 1.4% in Q3, Rentokil still lags behind key competitor Rollins, which posted a much stronger 10.3% growth for FY24.
In response to the integration difficulties, Rentokil revised its consolidation strategy. Instead of merging 600 branches into 400, the company now focuses on a hybrid model, combining larger hubs with smaller “satellite” branches to improve local presence and operational flexibility. Early results from this new approach have been positive, and the network is expected to expand significantly beyond 500 branches. Additionally, Rentokil has decided to preserve nine well-recognized regional brands, alongside the core Rentokil and Terminix names, thus maintaining brand equity while avoiding forced unification. Although integration remains a work in progress, significant milestones have been achieved. Over 250 branches are now operating on unified IT systems, and 58 Terminix branches were migrated in the second half of 2024. A pilot initiative that covered rebranding, routing, and compensation structures showed positive early results, with 15% of Terminix branches now fully integrated.
Despite the challenges faced in North America, Rentokil’s strong global leadership position and resilient international operations continue to provide a solid foundation for long-term growth. While management’s margin targets now appear increasingly ambitious, the company’s industry-leading position and revised integration roadmap suggest that it remains a compelling investment for the future. Rentokil’s stock price stood at £3.55 on March 27, 2024, reflecting an 11% decline year-to-date. With a market capitalization of £8.9 billion, the company currently trades at an EV/EBITDA multiple of 10.6x, which is below its fair value estimate of £4.50. This suggests a 26% upside from the current price, with an expected internal rate of return (IRR) of 14.6% over the projected period.
Looking ahead, Rentokil’s revenue growth is projected to be modest, with a compound annual growth rate (CAGR) of 3.8%, reaching £6.6 billion by FY2029. For FY2025, revenue is expected to rise by 3%, in line with analyst consensus, with growth accelerating to 4% from FY2026 onward, slightly below the company’s medium-term guidance of 4.5%-6.5%. Adjusted EBITDA margins are expected to average 23.3%, rising to 24.2% by FY2029. For FY2025, Rentokil’s adjusted operating margin is forecasted to remain flat at 15.5%, with no near-term margin expansion expected. By FY2029, the adjusted operating margin is anticipated to rise to 18.5%, which is more conservative than the company’s target of over 20% for North America by FY2027.
Free cash flow projections indicate a terminal FCF margin of 13.3%, above the company’s five-year average of 10.7%. Rentokil’s discounted cash flow (DCF) valuation suggests a fair price per share of £4.48, offering an IRR of 14.6%. Sensitivity analysis shows that potential changes in terminal multiples and discount rates could lead to varying upside and downside risks. Despite recent challenges, Rentokil’s strong position in the pest control industry, its robust brand portfolio, and expanding international presence provide a solid foundation for future growth. However, tangible progress in North America is necessary to regain full confidence in the company’s management. Given its current valuation, Rentokil presents an attractive investment opportunity relative to its long-term fundamentals, with significant upside potential if the company successfully navigates its integration challenges.
Rentokil Initial plc (RTO) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 24 hedge fund portfolios held RTO at the end of the fourth quarter which was 19 in the previous quarter. While we acknowledge the risk and potential of RTO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than RTO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
