LONDON -- The shares of Rentokil Initial (LSE: RTO ) rallied 5% during London trade today after the FTSE 250 midcap announced it had off-loaded its parcel delivery company, City Link, for just 1 pounds. However, the stock sold off throughout the afternoon to end the day slightly below breakeven.
Rentokil, most famous for its pest control services, will continue to run City Link while the new owner, private-equity firm Better Capital, invests a fresh 40 million pounds. The parcel business lost 26 million pounds in 2012.
Rentokil accompanied the disposal announcement with its first-quarter figures, which revealed that pre-tax profit had slumped by 11% to less than 10 million pounds. Sales, however, advanced 3% to reach 645 million pounds.
Alan Brown, Rentokil's chief executive, said:
I believe City Link has now turned the corner after five years of substantial losses. Rentokil Initial has decided to divest of City Link at this stage of the turnaround so that we can concentrate on our core international businesses in Pest, Hygiene and Workwear. The sale positions Rentokil Initial as a stronger and more focused group.
Continental Europe has become more challenging, with strong pricing pressure particularly in flat linen. Restructuring is progressing in Rentokil Initial's three major workwear markets of France, Benelux and Germany. This, coupled with a strong innovation program in H2 2013, will deliver material benefits progressively through 2013 and into 2014, which should more than offset current market pressures.
After today's update, Rentokil's shares trade at 12 times earnings and offer a dividend yield of 2.2%. Of course, whether that valuation, today's results, and the wider prospects for the U.K. services industry all combine to make Rentokil's shares a buy remains your decision.
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