UK - The 'ridiculous' prices in soap and loo paper

published 31 October 2005

Soon after its floatation in "unhelpful" market conditions in June 2001, the Personal Hygiene Services Group saw sales broach the £100m barrier, says the Small Cap Shares newsletter. Since then, organic annual growth of 5% and a steady stream of acquisitions has pushed sales over £160m. Much of this growth comes from the "ridiculously profitable" main division, PHS Washrooms, which supplies soap, towels, dryers, sanitary bins and toilet paper to factories, pubs and offices. It also collects and disposes of dental, clinical and pharmaceutical waste. Last year, the division made profits of £46m (82% of the group total) on sales of £100m (71%). Most customers sign up for three-year contracts and typically 85% of contracts are renewed. Nonetheless, most of the growth comes from acquisitions - there were 11 alone last year, costing £20m - placing PHS second only to Rentokil in this market.

PHS is also number one in the mat rental market. Its Treadsmart division last year made £14m of doormat and speciality mat sales, generating profits of £4m. Mirror sales of £14m came from the plant division, although the real growth came from the newly launched water dispenser business, Waterlogic, which last year had sales of £7m and made £2m. It specialises in plumbed-in machines, which are displacing refillable bottle water coolers, a sector which is growing at 20% per annum and where customer retention is 87%. There is no denying that if Rentokil recovers some momentum in the UK then it would cause problems for PHS, but "the signs are hard to detect so far". Last year, PHS's 16 acquisitions were all UK-based; Rentokil's 12 were all abroad, from where half its sales are derived. It seems as if Rentokil lacks the focus to respond effectively to the challenge of PHS at home. Both firms already control 70% of the UK washroom sector, thought to be worth £300m a year, and have little to gain by competing on price, so profitability should be sustainable.

And likely, given PHS's "formidable selling machine", which last year helped to lift operating profits from £34m to £41m; earnings per share rose 17%. And given its contracted revenues, phenomenal profitability and matching cash flow, PHS's net debt of £88m is "conservative". Earnings are slated to grow 13% this year (to March 2004), and the same again next year. If that bears out, the rating is 13 times - not a lot. Buy.