Rentokil turnaround on track but shares fall

LONDON, Nov 6 (Reuters) - British pest control to parcel delivery firm Rentokil Initial (RTO.L) said its five-year turnaround plan was gathering pace as it posted an 82 percent increase in third-quarter profit and forecast more progress in the balance of 2009.

However, shares in the firm, whose businesses also include cleaning and the hiring out of uniforms and tropical plants, fell 7 percent as investors booked profits on concerns over the outlook for 2010.

The stock was down 7.9 pence at 104.1 pence at 1115 GMT, valuing the business at 2 billion pounds ($3.30 billion).

Before Friday's update, Rentokil shares had more than doubled over the last year, outperforming the DJ Stoxx European industrial goods and services sector index .SXNP by 65 percent.

"It would be tempting to believe that the lower (Q3) losses in parcels (Rentokil's City Link business) mark a change of fortunes for Rentokil and the share price is certainly reflecting this.

However, the outlook for the group is still uncertain and we retain our sell stance," said Seymour Pierce analyst Kevin Lapwood.

"The shares are trading on over 20 times our FY 2009 estimates, which now looks too high for a late cycle services company."

Rentokil brought in Alan Brown and John McAdam -- who together led a turnaround at British chemicals group ICI -- as CEO and chairman last year.

The pair are trying to reverse years of underperformance and botched acquisitions by improving customer service, operational efficiency and cutting costs.

"We anticipate a further quarter of good delivery in Q4 despite few signs of economic recovery in our major markets," said Brown.

He told reporters he would detail a new growth strategy when Rentokil publishes 2009 results in February.

The focus will on targeting sustainable organic growth in the group's pests and washrooms divisions.

"They are our biggest businesses, they account for the great majority of our 1,000 branches across the world, so we can get most leverage by focusing on pests and washrooms," said the CEO, who did not rule out small bolt-on acquisitions.

The support services company, which issued a string of profit warnings in 2007 and 2008, said its profit before tax and one-off items was 49.6 million pounds in the three months to Sept. 30.

This was ahead of analysts' consensus forecast of about 46 million pounds and compares with 16.6 million pounds in the same period last year.

The outcome was driven by good progress in fixing the firm's problem businesses, particularly City Link, and no provisions for bad debt in the period versus 6 million pounds in the same period last year.

Revenue fell 3.2 percent at constant currencies to 622.6 million pounds, the same percentage fall as the second quarter, but was up 3.6 percent at actual exchange rates. Some 70 percent of Rentokil's earnings stream is in euros.

City Link made a loss of 1.3 million pounds in the third quarter and Brown forecast it would make a full year operating loss of 7 million pounds, better than previous guidance of a loss of 12 million pounds. In 2008 it made a loss of 43 million pounds.

The CEO estimated City Link would get a 1 million to 2 million pounds profit boost from the recent strike at Royal Mail and forecast the business would be profitable in the fourth quarter and throughout 2010.