Rentokil stock falls as weakness in international markets offsets NA strength

Investing.com -- Shares of Rentokil (LSE:RTO) dropped 3% following the release of its full-year 2024 financial results.

The company’s performance revealed a mixed picture, with North America profits slightly exceeding expectations, but weaker international trading and a free cash flow (FCF) miss contributed to the stock’s decline.

Rentokil’s second-half profits in North America were approximately 3% above projections, but this was overshadowed by lower-than-expected trading in international markets, with earnings before interest, taxes, and amortization (EBITA) coming in line overall due to reduced central costs.

The fourth quarter saw group organic growth of 2.8%, yet both Europe & Latin America and the UK underperformed. Despite these setbacks, the overall profit before tax (PBT) for the full year aligned with forecasts.

A notable area of concern was the company’s free cash flow, which fell around 10% short of estimates at £410m, primarily due to a higher working capital outflow. Net debt ended up £146m higher than anticipated at £3.2bn, resulting in a leverage ratio of 2.9 times, slightly above the estimated 2.8 times.

Consequently, Rentokil has adjusted its free cash flow conversion expectation for 2025 to 80%, down from a previously modeled 92%.

In response to these challenges, Rentokil is making strategic changes, including a renewed focus on customer retention and a revised brand strategy that will maintain nine specific regional core brands alongside Rentokil and Terminix.

The company also plans to increase its branch network, adding 100 branches to the original target of 400, which will result in a post-integration network of 500 branches. This expansion includes keeping some branches open that were slated for closure and opening new small satellite branch locations, with 10 already piloted and 22 operational.

Despite the financial miss, Rentokil anticipates its profit before tax for FY25 to meet market expectations, which currently stand at £734m.

Barclays (LON:BARC) commented on the strategic updates, stating, "Our view - these are all positive developments."

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