Jefferies sees upside at Rentokil after recent share-price plunge

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.