JPMorgan sees earnings upside, M&A optionality at Rentokil

JPMorgan Cazenove upgraded its recommendation on shares of Rentokil Initial to ‘overweight’ from ‘neutral’ on Friday and lifted the price target to 560p from 430p as it pointed to earnings upside and M&A optionality.

The bank said it lost its nerve after the company’s Covid-19 update and moved to ‘neutral’ as it reckoned the stock was riskier than, for example, Experian on the same multiple, given its exposure to the hospitality sector.

"However, recent newsflow has been more supportive than we feared," JPM said. "We still see risks to receivables and the profit & loss from client defaults, but we cannot ignore the potential upgrades to 2020 consensus and we believe Rentokil is likely to resume M&A during H2."

JPM highlighted positive earnings momentum and said it still sees Rentokil as a long-term winner.

"We see potential upside to 2020 consensus as there are still a number of relatively bearish forecasts out there," it said. JPM’s 2020 pre-tax profit estimate of £314m is around 10% above Bloomberg consensus and sits towards the top of the company consensus range of £163m to £319m, it said.

At 1045 BST, the shares were up 3% at 514.60p.