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The following segment was excerpted from this fund letter.
Rentokil (NYSE:RTO)
A dramatic 30% share price fall in reaction to a profit warning at Rentokil triggered Chris’s efforts to underwrite the pest control opportunity. In the merger integration with Terminix, one of the leading brands in the US pest control market, Rentokil had a marketing hiccup as teams transitioned. This caused the company to report lower US organic growth than its highly valued “compounder” peer Rollins (which owns the Orkin brand).
Terminix has suffered from 5 CEOs in the last decade, as its private equity dominated board constantly changed strategies to chase short-term profit bumps. This meant underinvesting in employee training in order to eke out higher near-term profit margins. Unfortunately, under this private-equity leadership, this led to the company’s net promoter score and employee morale hitting embarrassingly low levels — with the NPS registering as low as -65.
This is all music to the ears of Rentokil’s owner-oriented CEO, Andy Ransom, who has publicly stated that “The single thing that keeps me awake at night is colleague retention.” Ransom joined Rentokil in 2008, later taking the reins in 2013, and immediately set about implementing his “RIGHT WAY” culture initiative. This strategy directly targets to improve employee and customer retention by investing behind employee training (the average first year pest control technician receives 260 hours of training) and fostering a positive people-first culture.
At its core, Rentokil’s “RIGHT WAY” is actually about creating a culture that enables employees to take ownership and accountability all while placing the customer first, which is crucial in a service business. This has led to Rentokil earning numerous “Best Workplace” awards in the UK along with an industry leading NPS of +48.
Ransom admits he had been stalking Terminix as an acquisition target for nearly a decade, but not until Terminix’s most recent CEO, Brett Ponton, implemented an employee-focused strategy termed “The Terminix Way” (which we understand was largely based on Rentokil’s “The Right Way”), was Ransom ready to act. While the integration of the two organizations is still in the early innings, Terminix employee retention is up over 500 basis points since the closing of the merger.
We believe Rentokil’s culture will help to bring additional progress towards further improving Terminix’s culture and operational processes. By continuously improving Terminix’s culture, it should increase employee retention, which in turn will improve customer retention, and thus significantly improve organic revenue and profitability. And this is all in addition to the “at least” $200 million of net cost synergies benefit outlined from the merger.
Due to the quarterly profit volatility making the company “uninvestable” for the compounder crowd, the business trades for 18x 2023 earnings, and that is before significant synergies ripple through the income statement— which should push group margins to best-in-class levels globally. That compares to Rollins’ 49x earnings multiple, where the compounder crowd continues to herd.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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