Rentokil wins City backing despite third profits alert

Rentokil has issued its third profits warning in five months, alerting investors that its troubled City Link parcel business would incur "a significant full-year loss".

While the support services conglomerate had previously warned of major problems at City Link, which it has been trying to integrate into its 2006 acquisition Target Express, it had hoped the division would break even for the year.

Despite yesterday's U-turn, however, shares in Rentokil finished the day 2.5p higher at 97.5p, reversing earlier falls as the former ICI bosses who have been running the company for only two months received the backing of the City. There were also hopes voiced that their long-term game plan could lead to the break-up of the company.

Rentokil's chief executive, Alan Brown, said he was "confident" that improvements in City Link's service would be "significant and rapid, based on the performance in recent weeks and the switching of management attention from integration to service and customers".

But he added: "The return of City Link to its former levels of profitability is likely to take some time."

Problems which emerged in the business in the fourth quarter of last year had continued into the new financial year, resulting in a first-quarter loss of £16.9m, Mr Brown said – compared with a profit of £10.2m at the unit during the same period in 2007.

The company hopes to turn the problems around by sharpening up its service and beefing up its infrastructure. That includes the development of a new parcel-handling "satellite hub" for the South-east at Heath-row. Previously, parcels from London to the south coast, for example, had to go via the Midlands. Other such hubs may be created elsewhere in the country.

Rentokil's previous profits alert resulted in Doug Flynn, chief executive, and Brian McGowan, chairman, receiving their marching orders. Alongside Mr Brown, the former chief financial officer at ICI, John McAdam, ICI's former chief executive, was appointed as chairman.

Mr Brown said Rentokil's five other divisions continued to trade in line with expectations. Last year, City Link reported revenues of £417.1m and turned a profit of £19.4m.

Analysts, while concerned about the profit warning, felt that the addition of the new management team boded well for the group's future.

Rentokil will give more details on the City Link situation when it issues its scheduled first-quarter trading update on 2 May.