Rentokil Initial PLC

On the face of it, second-quarter results were not disastrous. However, shares fell by 18% in early trading as management revealed weak North American demand, a restructuring of its North American business, and the removal of its 20% North American margin target.

Why it matters: We are less concerned about short-term weakness in demand, as Rollins saw a similar impact and the market has historically been resilient. We, and we believe the market, are more focused on restructuring and the removal of margin guidance. Restructuring is robust, including employee reductions, efficiency replication, splitting of US residential and commercial businesses, and portfolio replication. We support the moves, as taking the time to fix lingering integration problems is required to close the margin gap with Rollins. Management said the removal of its 2027 20% North American target is a shift in strategy rather than a change in margin ambition. Instead, management is redeploying cost savings back into growth initiatives.

The bottom line: We are lowering our fair value estimates by 9% to GBX 510 and $34.0 for narrow-moat Rentokil after lowering 2026 revenue, reducing margin growth, and factoring in additional restructuring costs. Shares are undervalued after the July 30 change. While our forecasts were below management's 20% guidance target, we lowered 2027 margin by 50 basis points and raised revenue to account for greater sales investments.

Big picture: If executed properly, we believe it is best for the business in the long run, as operating inefficiencies, such as a lack of a standardized operating model or platform, contribute to the margin, moat, and multiple differences relative to Rollins. Management intends to apply the same cost-efficiency playbook used in North America across the rest of the group and internationally, in addition to replicating best sales/operational excellence.

Rollins underwent similar changes with its BOSS system in 2014, resulting in material margin improvements. Given their comparable scale, both Rollins and Rentokil have the potential to earn a wide moat through scale-based cost advantages. Rentokil would need to close this margin gap further through greater operational improvements to re-earn a wide moat, as we are not confident

Rentokil has discussed improvements to its operations, including an optimized branch network with standardized systems and processes, as well as standardized IT processes, but it has yet to make comparable improvements to its systems, as those undertaken at BOSS.

For a deep dive into the moats and valuations of Rentokil and peer Rollins, see our Dec. 8, 2025, report, "Exterminator’s Postacquisition Rebuilding Has Moaty Potential."

We are lowering our fair value estimate to $34 per share as management revealed weak North American demand, a restructuring of its North American business, and the removal of its 20% North American margin target, corresponding to a forward enterprise value/EBITDA multiple of 15.1 times 2026 EBITDA of $1.3 billion.

We anticipate Rentokil’s organic revenue to increase over the first five years of our forecast from low current levels as the firm integrates Terminix into its North American business and resolves customer and employee retention issues, which led to poor sales lead development and execution over the past three years. Over the second half of our investment period, we anticipate 5% organic revenue growth and an additional 1.5% from acquisitions. Industry tailwinds, such as rising global temperatures prolonging pest season and greater attention to and investment in health and safety since the pandemic, will aid in this growth.

We forecast margins to increase relative to historical levels, especially in the few years following integration, from 2027 to 2030. The Terminix acquisition materially increases Rentokil’s route density, making each additional new customer margin-accretive in denser areas. We forecast North American adjusted operating margins to expand but at a lower rate than previously guided, given additional investments in organic growth. We believe our margin forecasts lean conservative, given the potential upside from accelerated scale or operating efficiencies gained via restructuring.

We assign Rentokil a narrow Morningstar Economic Moat Rating due to its cost advantage from scale in operations and route density. Poor operational performance in the wake of the Terminix acquisition and lack of brand intangible assets keep it from earning a wide moat like its peer, Rollins.

Rentokil’s largest business, pest control, helps stop pests, including rodents, termites, bedbugs, cockroaches, ants, wasps, and more, for residential and commercial customers. Rentokil also has a hygiene and well-being business (15% of revenue), which we rate as having no moat.

Rentokil and Rollins dominate the pest control industry in the United States, holding 30% and 24% market share of the top 100 pest control firms, respectively. Rentokil complements organic growth with bolt-on acquisitions to maintain its scale advantage; it completed 36 in 2025.

Many costs are primarily incurred at the local level, so an extensive nationwide footprint alone does little to reduce them. To take advantage of scale in servicing, national pest-control companies must have regional scale in each market they operate in. There is a fine line between too few branches, which leads to lost sales, and too many branches, which leads to weaker margins. Evidence suggests that both firms walk this line more effectively than the average pest-control firm, matching their branch density to demand, allowing each technician to serve more clients, reducing unit costs per customer serviced relative to the industry average, thereby increasing revenue per location and revenue per employee.

Scale is also advantageous given the pest-control industry’s high fixed costs, which have accounted for 70%-80 % of total cash operating costs over the past three years. This gives both an advantage over smaller local peers, as they can spread high fixed costs—such as sales and marketing, training, and IT and back-end services—across a larger revenue base, thereby reducing the per-unit price.

Rentokil’s network of local branches constitutes a formidable barrier to entry. A regional pest control firm would need time and capital to replicate Rentokil's footprint and achieve comparable unit costs. For example, a business would need to acquire the next eight largest North American pest control firms to reach Rentokil's size. An existing firm with deep pockets and national scale in a related area seeking to enter the pest control market would require substantial investment to build a network that could rival Rentokil’s.

Rentokil had ROICs above the cost of capital prior to the last three years and shares many similarities with wide-moat peer Rollins. Based on available data and estimates, localized costs related to route density, such as employee, fleet, and property costs, are similar, indicating that both firms benefit from economies of scale. Rentokil also substantially strengthened its cost-advantage moat in North America through the acquisition of Terminix. Despite early struggles with sales execution, this has already led to higher margins, and many of the synergy efforts remain incomplete.

However, due to struggles integrating Terminix and its position relative to Rollins, we do not award Rentokil a wide moat. Rollins and Rentokil’s margins began to diverge after the launch of Rollins’ Boss system, which improves back-end efficiency and route optimization. The system is a key component of Rollins’s almost 7-percentage-point increase in operating margin over the past 15 years. Rentokil has failed to leverage its scale equally, with its margin increasing by 2 percentage points over the same period. Rentokil’s new CEO Mike Duffy has instituted a restructuring plan to close this operational gap over the next few years by implementing global best practices.

Also, we do not believe Rentokil benefits from a brand advantage like its peer, Rollins. Rentokil and its leading North American brand, Terminix, have strong brand recognition and total brand awareness comparable to Rollins’ leading brand, Orkin. Risk aversion is another factor driving consumers to well-known brands, especially in commercials. The perceived downside risk of untested products makes brand recognition highly influential in purchasing decisions and helps maintain strong pricing power.

However, Rentokil has not shown that it can capitalize on its strong brand awareness. Orkin is priced either the same as or slightly above Terminix. Furthermore, Orkin leverages its leading awareness, with 50% of new Orkin clients not considering a competitor when purchasing. Rentokil does not see similar behavior in its clients, evidenced by its sales struggles after the acquisition. While Rentokil achieves higher margins than the industry average, it has trailed Rollins by 5 percentage points over the past decade. This makes us hesitant to award a moat to intangible assets in pest control.

While Rentokil’s hygiene and wellness business shares some moaty characteristics with the pest business, we do not believe it earns a cost advantage moat.

The Terminix acquisition bolsters Rentokil’s cost advantage from route density and offers higher margin potential after the integration.

Rentokil can continue to grow following the Terminix acquisition, as half of the industry comprises smaller businesses generating revenue of under $50 million.

Market drivers such as a greater awareness of public health following covid and rising urbanization provide tailwinds for durable organic growth.

As the industry consolidates, deal multiples could rise on the 40-50 acquisitions that Rentokil completes a year, harming return on invested capital.

Rentokil has struggled to integrate its Terminix acquisition, and continued issues with sales generation will diminish its route density advantage.

The hygiene and workwear businesses do not contribute to the cost advantage moat, weighing on ROICs.