Fundamental Review of Two Blue-Chip Stocks Amid the Covid-19 Calamity: Rentokil Initial & Flutter Entertainment

In the wake of Covid-19 pandemic, economies are forced to extend the lockdown as a social distancing measure, which is concerning the blue-chip stocks. At one side, some businesses related to pharmaceutical and essential services are performing resiliently; however, other companies are seeking credit facilities to boost liquidity. Let’s discuss a pest control service provider Rentokil Initial PLC and a sports betting and entertainment provider, Flutter Entertainment PLC. Both the companies have released their first-quarter trading updates. At the time of writing (9.20 AM GMT), Rentokil Initial and Flutter Entertainment shares accelerated by over 4 percent each. Let’s understand the impact of their respective updates in light of their business offerings, strategies and performance.

Rentokil Initial PLC (LON:RTO)

Rentokil PLC is a FTSE 100 listed pest control service provider. The company seeks to provide services that protect people and enhance lives by offering a complete range of pest control services as well as a range of other specialist services. It has operations in around 81 countries across five regions. In 2019, the group made 41 acquisitions (30 in Pest Control and 16 in North America) in 23 countries.

(Source: Company Website)

Business Model and Operating Segments

• Geographically, RTO’s business is divided into five regions, namely North America, Europe, UK and Rest of World, Asia and Pacific. And, 80% of the revenue is generated outside of the United Kingdom.
• In terms of business lines, RTO predominantly focuses on route-based services, Pest Control and Hygiene. However, it also had a range of specialist services including Property care, Specialist hygiene, Plants and Medical Services. RTO’s pest control business is spread across 70 countries.

Strategic Priorities for 2020, Considering the ‘Big Six’ Challenges

• Employee Retention: It refers to attracting, retaining and developing the pool of talent while focusing on diversity.
• Driving Organic Revenue Growth: To raise the market presence and increasing global accounts by tapping opportunities in the pest control business.
• Strengthening the Hygiene Business Segment: Grow the business inorganically by acquisitions to build density in the hygiene business.
• M&A Activities: Continue to seek acquisitions of high-growth hygiene and pest control business.
• Creating Value through Innovation and Digitalization: Leveraging current and the new technologies to widen the portfolio of sector specific products.
• Managing the Business Responsibly: It refers to talking initiatives and policies to prevent deforestation, increase diversity and keep the healthy global environment.

Key Performing Indicators of 2019 from the Shareholders Perspective

(Source: Company Website)

Significant Updates of the Recent Past:

• 1^st April 2020: The board of RTO announced the appointment of Cathy Turner, as a Non-Executive Director.
• 4^th December 2019: RTO has received an award for ‘Diversity and Inclusion’ from Britain’s most admired companies.
• 1^st November 2019: The group has acquired the business of Florida Pest Control to strengthen their pest control business.

Q1 Trading Update – Discussing the Performance and Good Progress in Action During the Crisis Phase

• The company made a good start to the year, with an increase of 7.2 per cent in ongoing revenue and ongoing operating profit increasing marginally ahead of revenue in the three months to 31 March 2020. Group net operating margins, including in the key North America region, grew in line with management expectations.
• The ongoing revenue for the first quarter of 2020 in Hygiene surged by 4.6%, Pest Control rose by 9.3 per cent, and Protect and Enhance up by 1.9 per cent. The company performance was impacted by Coronavirus outbreak in the last two weeks of March; however, there was no significant impact in the first 10 weeks of 2020. In March, overall Group Ongoing Revenue was 4.4 per cent higher than the prior year, with Hygiene up 2.6 per cent and Pest Control up 6.6 per cent, but the decline of 2.3 per cent in Protect & Enhance category. In most of the geographical region, the revenue was down in March 2020, due to lockdown for several weeks.
• Key actions for good progress during the crisis phase are:
  • Firstly, the group has launched specialist disinfection services internationally.
  • Secondly, the group has taken measures to reduce costs, boost liquidity, and conserve cash (salary reductions for the Board and senior management grades, delivering savings of over £500m for 2020, including suspending the M&A programme and withdrawing the dividend, reducing cash tax spend, and suspending all discretionary capex).
• The group has cash of £1.2 billion, with net debt to EBITDA covenant of 3.5:1, which can be surged to 4.0x in certain circumstances.

(Source: Trading Update, Company Website)

Share Price Performance

Daily Chart as of April 17th, 2020, before the market close (Source: Thomson Reuters)

RTO’s shares, at the time of writing before the market close (at 9:33 AM GMT) on 17th April 2020, were trading at GBX 426.60. Stock's 52 weeks High is GBX 535.20 and Low is GBX 289.20.

Short-Term Future Impact of the Virus, Mainly Depends on the Prevalence of Cases of the COVID-19

While the impact of the virus stays highly uncertain, the company is anticipating the impact in the second quarter of 2020 will be greater than in the previous two weeks of March 2020 as most of the countries are wedged by lockdowns. In China, Hong Kong and South Korea, the operations are returning to normal. However, in FY20, the group is confident of delivering further financial and operational progress. Moreover, the company performed decently in 2019 with a combination of organic and acquisitive growth.

Flutter Entertainment PLC (LON:FLTR)

Flutter Entertainment PLC is a FTSE 100 listed company, which is engaged in sports betting, entertainment and gaming business globally. The group caters around 6,000 online transactions per minute to 7 million active customers in more than 100 countries. It has a workforce of 9,000 employees across over 620 retail shops and 18 offices.

(Source: Company Website)

Long-term Strategic Priorities

• Creating a diversified product portfolio with technologically sound platforms across all its verticals.
• Increasing geographic diversification.
• Accelerating the four-pillar strategy by:
  • Incremental growth in core markets. Core markets consist of UK, Australia and Ireland, where the group has a significant position in terms of earnings and cash flows.
  • Enhancement of international positioning.
  • Capturing the growth opportunities for expanding the core markets.
  • Rigorously pursuing the opportunities in US Markets.
• Generating the substantial shareholder’s value through financial synergies, revenue growth and cost-efficiency.

Recent Developments Causing a Material Impact over Business

• 16^th March 2020: The group affirmed that cancellation and postponement of sports events due to the outbreak of coronavirus, will have a material impact over the earnings since 78 per cent of its revenue in 2019, was delivered through the bets against sports events globally.
• 2^nd October 2019: The group announced the integration of The Stars Group Inc. into the Flutter Entertainment, in terms of all-share combination.

Q1 FY20 Trading Update (for the three months ended 31 March 2020): Reflecting Growth in Revenue

• Despite the impact of sports disruption, the group revenue increased by 16 per cent to £547 million in Q1 FY2020 (Q1 FY19: £478 million), with an increase of 13 per cent and 25 per cent in Sports revenue and Gaming revenue. In Pre-March 15, the total revenue up 29%, Sports revenue up 30 per cent, and Gaming revenue up by 27 per cent. The increase in revenue was mainly driven by the online business growth of 20 per cent during the unprecedented crisis.
• In sports business, the revenue has delivered excellent performance, due to robust active customer growth in the US (FanDuel has acquired more than 100,000 new customers since the beginning of the year) and Australia (+16%) and, further boosted by bookmaker friendly sports results in all areas.
• In the Gaming division, the company has delivered good growth in PPB Online of 17 per cent and the US of 260 per cent but a decline of 20 per cent in PPB retail.
• In PPB Online, overall revenue has reduced by 32% year on year, driven by the suspension of UK and Irish racing. Led by a continuation of racing in Australia and the US, a reduction of 46% in sports revenue was less than anticipated.
• On 31^st March 2020, the group net debt was £240 million, with £460 million of undrawn facilities and available cash.

(Source: Trading Update, Company Website)

Share Price Performance

Daily Chart as of April 17th, 2020, before the market close (Source: Thomson Reuters)

FLTR’s shares, at the time of writing before the market close (at 9:33 AM GMT) on 17th April 2020, were trading at GBX 8,512. Stock's 52 weeks High is GBX 9,532 and Low is GBX 5,004.

Catalysts That can Drive Good Progress in Future

The company is in well-positioned in the current period, prior to the disruption to sporting events in mid-March. The online gaming market in which the group operates is continuously evolving that too at a rapid pace and is full of growth opportunities. The company is looking forward to expanding its operations through acquisitions and organically with the development of new products.

Disclaimer

The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. The above article is NOT a solicitation or recommendation to buy, sell or hold the stock of the company (or companies) under discussion. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site.