Rentokil: High-Quality Pest Control Business With Economies of Scale

Rodrigo Lopez Buenrostro of KUE Capital presented his investment thesis on Rentokil Initial (UK: RTO) at Wide-Moat Investing Summit 2024.

Thesis summary:

Rentokil solves a human problem that has existed for the past 5,000 years since humans started to live in and around cities. RTO is the largest pest control business in terms of global market share. This is a boring yet extremely profitable business that grows the top line by 5-7% each year and has 30% ROEs on a consistent basis. The business model is recession-resilient, as both residential and commercial clients need to have a reliable pest control company to ensure the safety and cleanliness of where they live and work.

Every big city around the world needs a trustworthy pest control business, especially now with warmer climates, more urbanization, and more pets in houses and commercial areas. In the context of a fragmented industry, RTO has consolidated around 300 small businesses in the past ten years, including the second-largest player in the US, Terminix, which RTO bought in 2022.

The market appears to be impatient with RTO’s integration of Terminix, which has taken longer than expected. Investors apparently do not believe that current management can continue to compound earnings at an attractive level. Herein lies the opportunity to buy a long-term compounder at a wide margin of safety.

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About the instructor:

Rodrigo Lopez Buenrostro is a Partner at Kue Capital where he invests to preserve capital over time. He currently leads the asset management division within the firm and divides his time between equity research and manager selection with a global mandate. Previously, Rodrigo worked as a summer equity analyst at SW Investments, a value-focused hedge fund in Chicago. He began his professional career as an Investment Banker at BBVA. Rodrigo is an MBA graduate from Chicago Booth Class of 2015 where he earned a concentration in Analytic Finance and was actively involved in the Investment Management community. He studied Business and Accounting at ITAM for undergraduate where he wrote his graduating thesis on hedge funds and started to invest personally. Rodrigo has always had an interest in finding the real value of assets, reading, and volunteering to teach basic concepts related to investing.

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