Cube Midcap Report (25 March 2020) – Creepy update from Rentokil #RTO #PSN

Cube Midcap Report (25 March 2020) – Creepy update from Rentokil #RTO #PSN


The FTSE is up by nearly 5% as I type – it was up 6% a few minutes ago.

There are huge moves in the FTSE-350:

  • Marston’s (+40%)
  • Virgin Money (+28%)
  • William Hill (+26%)
  • Aston Martin (+27%)
  • Michaells & Butlers (+27.5%)

These are companies which led the collapse, so it is appropriate that they would lead the market on a day of recovery. Their long-term shareholders will still be feeling a lot of pain.

Companies reporting today include pest control/hygiene group Rentokil (RTO) and homebuilders Persimmon (PSN) and Bellway (BWY).

Via the FT, I’ve found the latest paper (PDF file) from epidemiologists at Oxford. They say:

If true, this is great news for the prospect that life can go back to normal before too long.

Rentokil (RTO)

  • Share price: 305.3 (-18%)
  • Market cap: £5.7 billion

Trading Update

You would think that a hygiene-focused PLC would do well in these conditions. However, pest control is not top of the agenda at the moment.

Rentokil announces today that it expects a “much more significant” (negative) impact from Covid-19, than it had previously anticipated. As most other companies have have done, it withdraws guidance for 2020.

Key points:

  • Pest control is considered an “essential service” in many countries, and others are likely to designate it as such, soon.
  • China services are back up and running for 75% of customers.
  • The most disrupted country is currently Italy. Service levels at 60%.

This isn’t news, but Rentokil confirms that it has been hit by the closure of hotels, restaurants, airlines, schools and some offices.

On the other hand, there is strong demand for hygiene services (especially disinfection) from food production, food retailing and heathcare. Staff are being trained for disinfection-related work,

Balance sheet

Some key points:

  • RTO’s net debt was £1,073 million as of December 2019 (see the annual results).

At December 2019, RTO’s bank credit facility (£550 million) was undrawn. It has now drawn down on this.

  • Cash available has therefore increased to £650 million.

Net debt doesn’t change when a company draws down debt, since its gross debt and cash both increase.

It’s only when the money is spent that the net debt level changes. I wonder if RTO needs to spend this warchest?

If it does, something that will change is its EBITDA requirement under banking covenants.

  • RTO’s bank covenant requires net debt/EBITDA to be 3.5x at the most (“4.0x in certain circumstances”).

Using last year’s net debt level (which may no longer be accurate), EBITDA probably needs to be over £300 million to stay in compliance. EBITDA last year was £600 million.


Given the uncertainty, RTO has gone into cash conservation mode:

  • No dividend payments or M&A. These measures will save a combined £300 million, versus previous guidance. A dividend had been proposed at the time of the preliminary results, but it will go no further.
  • Employment costs are 45% of its revenues. This cost is being scaled back in a wide variety of ways, including pay cuts for the Board and all senior management grades £100 million will be saved this way.
  • Capex to reduce by £75 million and will fall below £200 million.
  • More work on receivables/inventory management
  • Delaying or deferring tax payments (£25 million saving).

Adding these up, I get an aggregate £500 million in savings. Sounds good!

My view

The covenants are the main thing – can Rentokil avoid tripping them?

It looks like it should be able to, based on the strong cash conversation measures announced today, and my estimate that EBITDA would need to halve to cause a problem. If business is back to normal (or something approaching normal) in a few months, then it shouldn’t have too much to worry about.

Even if EBITDA does halve, then the strong support this company has received from the equity and bond markets in recent years suggests to me that it would be able to plug the gap quite easily. It’s not possible to predict that with 100% certainty, of course. And it’s scary that the company feels forced to take such radical actions, in order to preserve its cash position.

At the end of the day, its a high-quality name and there is probably a level where I’d consider opening a position in it. But we are spoiled for choice now, in my view, when it comes to buying opportunities in quality names. RTO is still on the expensive side at around 20x earnings (and that’s before taking downgrades into account).


Persimmon (PSN)

  • Share price: £18.46p (+9%)
  • Market cap: £5.9 billion

Covid-19, Capital Return Plan and AGM Updates

This huge housebuilder saw its share price halve over the past month.


  • All sales offices closing tomorrow.
  • No more customer care site visits, except in emergencies.
  • Regional offices to close except for skeleton staff to facilitate others who are working from home.
  • Orderly shutdown on construction sites. Only essential work is taking place.

Persimmon is preparing for “a significant delay in the timing of legal completions, a rise in cancellation rates and a material slowdown in new sales, the extent and duration of which is uncertain“.

It is cancelling its dividends, including a dividend which was supposed to be paid next week and already went ex-dividend!

That 125p cancelled dividend is sufficient to account for most of today’s rise in the share price. Share prices go down when a share trades ex-dividend, and it stands to reason that it should go back up if said dividend is cancelled.

The company’s cash balance is currently £610 million and it also has access to a £300 million credit facility. That sounds like plenty of resources to get through this episode.

Net assets per share at Persimmon were £10.22p at year-end. I don’t like paying a large premium to NAV for a housebuilder, but I acknowledge that Persimmon’s strong profitability might justify paying up for it at this level.



That’s all for today – cheers!




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