No Pain, No Gain: Rentokil has yet to prove it can clean up the mess

Shares of Rentokil Initial have been a disappointing investment for the No Pain, No Gain portfolio. Although they have not slipped into the red since their recruitment in the summer of 2004, they have lagged behind the stock market and even suffered the indignity of relegation from the Footsie blue chip index.

I had hoped that by now the pest control to washroom services group, created in flamboyant style by the controversial Sir Clive Thompson, would be well on its way to recovering from the difficulties that provoked its fall from grace. But it is taking a long time to get the group motoring along the recovery road and there would appear to be little hope of progress until next year. Even this modest expectation must be cloaked in caution.

Last week it produced another set of uninspiring figures. Although income continues to grow, Rentokil is failing to translate it into profits and the pre-tax figure in the third quarter fell 3.6 per cent to £51.2m. With the French washroom business under the shadow of what could be a long running and costly competition investigation, it is not surprising that shares fell perilously close to the portfolio's 143p buying price. Then break up stories swirled around and they jumped to 155p before, at the time of writing, settling near 153p.

Since Doug Flynn was drafted in to revitalise the sprawling business, Rentokil has been reshaping. It has sold off bits and pieces, added small bolt-ons and flexed its muscles by acquiring more substantial operations. Now, following an investment presentation, there is a distinct impression it could be near to more disposals. One story is that the significant electronic security division could soon be sold; other deals could follow.

If such stock market thoughts represent Flynn's thinking, then a slimmed down, but more cost conscious and hopefully more profitable, Rentokil could emerge more quickly than had hitherto been expected.

Although progress has, on the surface, been rather slow, it is clear that Flynn has a tough task. As he says, the group was "organised on a rather eclectic mix of business activities and regional territories".

For years, under Sir Clive, Rentokil was a stock market darling with a Ballyhooed 20 per cent earnings per share growth record. Then cracks appeared. The shares offer a tantalising yield of near 5 per cent. But such a return will not offer much comfort to long term shareholders whose capital has declined alarmingly. Not so long ago the shares were around 500p - a level they will not recapture, even with a bid, in the foreseeable future.

The portfolio's other Footsie constituent, brewer Scottish & Newcastle, continues to make headway but cannot resist spraying a little caution around. Although the current year is unfolding as expected, it is worried about next year's smoking ban in England and Wales and weakness in France, where it has a substantial influence. In addition there is a "depressed consumer environment" on the home front. To counter increasing overheads, the only survivor of the once all-powerful "big six" of the British beerage will indulge in a new round of economies next year. It is already deeply involved in a £60m cost cutting exercise.

Scottish also offers a strong dividend yield and its shares are, as far as the portfolio is concerned, comfortably in the money. They are near 550p although they were once much higher.

The group remains a robust player but in my view it is takeover possibilities that make its shares such an attractive two-way bet. The world-wide brewing industry continues to consolidate and Scottish looks a prime bid candidate.

Georgica, in terms of size, is far removed from the Footsie. After touching 162p, its shares have slumped to 125p as tentative takeover talks ended and trading at its ten pin bowling centres and snooker clubs suffered from the hot summery weather, the World Cup and Scotland's smoking ban. The group made a £356,000 loss in its first nine months against an £819,000 profit for the same period the previous year. Property sales, however, pushed it back into the black.

Georgica expects to realise "substantial shareholder value" next year, an ambition that produced the take over approaches. I expect the ten pin and cue sports businesses to be sold or floated separately or, perhaps, off-loaded in bits and pieces. So far, the group has not lived up to its early promise.

cash@independent.co.uk