SHARES in Rentokil plunged by more than 8% at one point yesterday, after it posted a fourth-quarter profit slump and cut its forecast for 2007.
Profits at the world's biggest pest control company fell the most since 2004 after earnings declined at four of its eight divisions, with the loss of contracts to supply soap and hand towels to hotels and office washrooms, and to supply tropical plants for rent.
Pre-tax profit dropped to £45.8m, from £54.7m from a year earlier. For the full year, net income dropped to £245m from £321.5m, a year earlier. Sales were up 13% to £2.12bn. Analysts had expected profit to decline 21% and sales to rise by 8.8%.
The stock fell as much as 14.25p, or 8.8%, the sharpest drop since May 2004, and closed at 151p, down 11.75p.
The shares have fallen 6.1% in the past six months, giving a market value of £2.72bn.
The steepest decline in earnings was at the pest control division, which accounts for 12% of sales. Fourth-quarter operating profit dropped by 38% to £10.7m.
Profitability for the company as a whole also worsened, with operating profit as a percentage of sales narrowing to 14.1% from 17% a year earlier. Margins were eroded by tough markets in Europe and expenses incurred from bolstering sales teams, said the group.
Chief executive Doug Flynn said the group was managing to keep hold of more business, with customer retention rate now at 89% compared with 87% a year ago. Still, Rentokil lost more contracts than it won in pest control, tropical plants and electronic security in the fourth quarter.
After fending off an attempt by businessman Gerry Robinson to install himself as executive chairman and return cash to shareholders in 2005, Flynn commenced a strategy of selling off non-core subsidiaries.
Flynn said yesterday he had drawn up a shortlist of possible buyers for Initial Electronic Security, which analysts say will raise more than £500m. Rentokil expects to strike a deal by June.
US conglomerate United Technologies, London-based buy-out firm Montagu Partners and other trade bidders and private equity firms are on the shortlist of five that will undertake due diligence before submitting offers.
The firm has already offloaded its UK, Canadian, US and Belgian security guard businesses as well as its Initial Style Conferences business to focus on more profitable areas.
Flynn said market conditions in continental Europe would continue to affect textiles and washroom services, its biggest unit, but that it expected to make good progress in pest control, parcel delivery and the Asia-Pacific region.
He said: "We are trying to be at the cautious end of modest we still have much to do in order to deliver consistent profit improvements."
Marc Van Sant, Citigroup analyst, said: "We still see ample earnings risk, particularly as first-quarter profits will likely be weak as cost inflation continues."
Seymour Pierce analyst Kevin Lapwood said: "They are below where we thought they were going to be Although they are pointing to revenue growth, it is not coming through in the margin yet."
The group said it would pay a final dividend of 5.25p, giving a total for the year of 7.38p.
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