LONDON (Reuters) - British services group Rentokil Initial Plc <RTO.L> warned on Thursday that weak retail trading would hit its quarterly profit, sending its shares down 24 percent to their lowest level for more than 12 years.
By Miyoung Kim
LONDON (Reuters) - British services group Rentokil Initial Plc <RTO.L> warned on Thursday that weak retail trading would hit its quarterly profit, sending its shares down 24 percent to their lowest level for more than 12 years.
It said business-to-business operations at its express parcels delivery business City Link had been significantly ahead of last year, but the business-to-consumer segment had slipped due to weaker consumer spending.
"As a result, fourth quarter profits from City Link are likely to be up to 10 million pounds ($20.4 million) below our expectations. This will have a similar impact on the results for the group as a whole," it said in a statement.
!ADVERTISEMENT!The warning came just one month after it said that City Link had continued its strong performance with 140 percent growth in revenue, buoyed by a robust business-to-business operation and the acquisition of Target Express in late 2006.
City Link gets around 70 percent of its annual revenues from the business-to-business market and the remaining from the business-to-consumer segment.
By 0617 EST, shares in Rentokil, whose businesses range from rat catching to tropical plant hire, plunged 23 percent to a 111.4 pence, their lowest since the end of March 1995.
Analysts said they will downgrade the stock.
"We believe a slowing economy may impact other parts of the group in 2008... Its businesses are much more sensitive to economic conditions than other sector stocks such as Capita, Serco, VT etc," Panumre Gordon analysts said in a note.
"As such, the shares look expensive at 18 times current year
EPS."
Analysts at Seymour Pierce cut their recommendations on the stock to 'hold', while Cazenove analysts cut their 2007 earnings per share estimates for Rentokil by 2 percent to 9.9 pence and pretax profit forecast to 215 million pounds from 225 million.
The cost of insuring Rentokil's debt against default also rose after the warning. Its five-year credit default swaps were 10 basis points wider at 68 basis points by 0535 EST, according to Deutsche Bank prices.
In November, Rentokil had said its forecast for 2007 underlying profit would be broadly in line with last year's 209 million pounds, and for 2008 underlying profit to grow by a mid-to-high single digit percentage.
"Management are maintaining their guidance for 2008 but with some economic pressure and a worsening background, this must now look questionable," UBS analysts said, adding the market consensus for 2008 was likely to fall by around 10 percent.
Rentokil, which will report its preliminary results on February 26, said on Thursday trading in other divisions remained in line with its expectations.
Before the trading update, analysts had expected Rentokil to report 221 million pounds in pretax profit for the year.
(Additional reporting by Natalie Harrison; Editing by Louise Ireland)
