Jefferies sees upside at Rentokil after recent share-price plunge

9th Jan 2024 10:22

(Sharecast News) - Jefferies has trimmed its target price for Rentokil Initial but still sees upside following the sharp fall in the stock over the past few months, saying it still sees a "favourable risk-reward despite near-term uncertainty".

Shares in the pest control company plunged in late October after the company warned of a "softer consumer demand environment" in the US, which held back organic growth in the third quarter.

There have also been some concerns about integration risk of the Terminix business, whose $6.7bn acquisition was completed in October 2022.

The stock has fallen 31% since the day before the October trading update and now stands at 413.2p, down 0.4% on the day. This has left the price-to-earnings ratio at a five-year low of 16x, Jefferies said.

"We are positive on the outlook for mid-term growth and margins in Rentokil's core business. We continue to see resilient total pest control growth supported by solid structural tailwinds and share gain from technology/innovation, with margins benefiting from completion of IT rollout and improving density," Jefferies said in a research note.

"While we are mindful of increased integration risk around Terminix over the next 12-month we continue to see an attractive risk reward for investors willing to ride out near-term volatility for the reward of c15% earnings CAGR FY23-25."

The broker has kept a 'buy' rating on the stock but cut its target price from 650p to 600p, which indicates 45% upside risk to the current price.