Deutsche Bank ups Rentokil to 'buy'

Deutsche Bank upgraded Rentokil to ‘buy’ from ‘hold’ and lifted the price target to 240p from 160p.

The bank said it expects Rentokil to outperform the more cyclical stocks in current markets through a combination of low single digit organic growth, with earnings momentum driven by bolt-on M&A that allows it to consolidate end markets.

This in turn should drive upside margin potential, DB added.

“With uncertainty being a key theme for markets in 2016, we favour stocks with cash generative business models and the ability to top up organic growth with low risk M&A. This is criteria under which Rentokil screens well.” It expects net debt/EBITDA to reach 1.7x by full-year 2017.

In addition, the bank said there is room for cash to be used to re-base the dividend upwards.

Deutsche Bank reckoned there was around 200 basis points of medium-term margin upside in Rentokil’s North American division, which made up around 29% of earnings before interest and amortisation in the first half.

It expects margin upside from gaining local market share and improving route density, productivity gains and leverage through online sales channels.

At 0926 BST, Rentokil shares were up 0.7% to 217.40p.