Trojan Global Income Fund

This was a disappointing month of performance for the Fund. Markets were shaken by the near-term oil shock that has driven share prices for most companies outside of the energy sector downward. History shows that although a supply shock like this is inflationary in the short term, over longer-term periods it leads to lower growth. In this circumstance we would expect to see weakness in areas we do not own such as mining, banks and industrials (the latter which we do own but not as much as we would like) to the benefit of the Fund. Clearly the events in the Middle East are impossible to forecast with any certainty. We stand ready to take advantage of any opportunities that may arise as a result of the current disruption and retain confidence in the fundamentals of the companies we hold.

Rentokil Initial is a good example of this. The business has performed well as the investment case has begun to proceed as expected.

Pest control is one of the most attractive business models in the service economy with recurring revenue, low churn, pricing power, and near-immunity to economic cycles. Rentokil is the largest such operator in the world, and in North America – the highest-margin, fastest-growing pest control market on earth – it is finally beginning to improve.

The opportunity to invest at an attractive valuation was provided by poor execution rather than concerns relating to the quality of the business. The acquisition of Terminix created problems for the management team via a confused strategy. This created a great deal of disruption, a dissatisfied workforce, market share loss and ultimately weak earnings. Following a change of management and strategy, this is in the process of reversing.

At the recent quarterly results, it was announced that North American organic growth reached 2.6%, leading the shares to rise 12% on the day. The investment case had been predicated on this change in earnings trajectory and so the positive reaction should not be seen as a surprise.

Management has moved from a turbulent centralised integration to something more pragmatic. The revised plan retains around 30 national, regional and local brands representing over 90% of revenue, with a branch network expanding to around 800 locations by end of 2026. Given the competitive advantage of the business is driven by local density and scale this is likely to be the correct course of action. A $100m cost reduction program should further underwrite earnings and profit margin improvement.

Free cash flow conversion is also improving and leverage has fallen. The shares remain excellent value compared to the closest North American peer, Rollins, and it remains a committed investment in the Fund.