Rentokil Initial has hit a near two year high after better than expected profits, despite the continuing drag of its struggling parcels business City Link.
The rat catcher and hygiene group jumped nearly 10%, up 8.8p to 99.3p, its best level since May 2011. Profits rose by 10.1% to £191m, better than forecasts of around £181m. The group finished the year strongly, with a 15.9% rise in profits in the fourth quarter, and it said the momentum was continuing. Chief executive Alan Brown said:
While we remain mindful of continuing tough conditions across many of our markets, the operational changes we made during the year [including £59m of cost savings], together with the acquisition of [US pest control business] Western Exterminator in December, give us confidence that 2013 will see us sustain the momentum we achieved in the final quarter of 2012.
It expects growth this year both organically and from bolt-on acquisitions.
But City Link made a £26.4m operating loss, despite revenues growing 4.8% as online shopping continues to expand. Its customer mix saw an increase in the number of larger but low margin business, while it saw declines in higher margin business. Analyst Gideon Adler at Investec said:
Rentokil preliminary results are a touch ahead, with organic revenue returning to growth in the fourth quarter. Cost savings have come in ahead of expectations and management sound confident of maintaining momentum into 213. City Link losses were marginally worse than guidance at £26.4m, and scrutiny around its roadmap to breakeven in 2013 looks set to intensify. The stock continues to screen cheaply, but with trading risk in Europe and City Link with plenty to prove, we remain holders for now.
Espirito Santo kept its buy rating, saying:
Rentokil has some attractive divisions capable of generating a sustainable high margin and return on invested capital. Steady operational and customer service improvements are also still helping to drive growth and profitability gain across the group. The group's overall value nevertheless remains undermined by a protracted recovery in City Link as well as cyclical pressure. Any re-allocation of capital into core route-based divisions could accelerate value creation.
But Bwin.partydigital has fallen 8p to 143.5p after a 17% fall in 2012 profits, following the introduction of a new gaming tax in its key German market, which hit its revenues in the country. It warned 2013 sales would be lower than current market estimates as it shifted focus to regulated markets.
Overall investors have taken their foot off the gas after the recent rally in stock markets. The FTSE 100 is down 8.40 points at 6521.01, as European leaders continue their summit to discuss the balance of austerity and growth. Chris Beauchamp, market analyst at IG, said:
Upward momentum for the London market has stalled this morning, but that doesn't mean that investors have lost their appetite for more gains. You only have to look back two days to see the conviction with which many regard this rally, when a sharp drop was turned around in the afternoon session.
With plenty of US data on today's horizon, including CPI, manufacturing figures and another Michigan confidence reading, there is the possibility that Wall Street will come along and drag a reluctant FTSE higher once again. Ahead of the open we expect a slightly weak start for the Dow Jones, opening down 25 points around 14,155.
The leading riser in the FTSE 100 at the moment is International Airlines Group, up 7.4p at 270.1p after the recent resolution of the strike threat at Iberia, and an upgrade from Morgan Stanley from equal weight to overweight.
Elsewhere Ocado has moved past its original float price of 180p, up 11.6p to 181.6p following its upbeat trading statement on Thursday and news of a licensing tie-up with supermarket group Morrisons, down 3.5p at 272.7p, for its online offering.
Exane BNP Paribas has raised its target price from 145p to 225p.
