Broker tips: Barclays, YouGov, Rentokil Initial

An article on Monday from Sky News indicated that Barclays was expected to announce that it has reduced its total employee base of 85,000 by 5,000 in 2023 when it reports its full-year results on 20 February, in an effort to address structural costs and improve profitability.

"It is understood that the majority of these roles will be lost from back office and central functions, implying that the impact on revenue will be limited," said Shore Capital analyst Gary Greenwood. "The group looks set to replace lost capabilities through greater use of technology, for which the level of additional investment that may be required is unclear. In taking such action, management will need to ensure that there is no detriment to customer service levels or business controls."

The cost of the job losses is expected to a one-off charge of £750.0m, taken in the fourth quarter, according to Greenwood, with efficiency benefits expected to come in the aftermath.

"We expect Barclays to provide a more detailed update on its plans to reduce structural costs and improve profitability and so return on tangible equity at the group’s full-year [...]. We make no changes to our forecasts ahead of the results and reiterate our positive stance," Greenwood said.

Shore Capital estimates a fair value price of 290.0p for Barclays, which implies a significant 87% upside on current prices, making it the broker's top pick among the mainstream UK banks.

Analysts at Berenberg reiterated their 'buy' rating and 1,350.0p target price on market research and data analytics firm YouGov on Tuesday following its acquisition of the Consumer Panel Services business of GfK.

YouGov announced the acquisition back in July 2023, in an all-cash transaction for a headline purchase price of €315.0m, financed with proceeds from a roughly £51.0m equity raise and a €280.0m term loan facility.

Berenberg said the acquisition of CPS GfK, an established leader in household purchase data, with panels across 18 European countries consisting of over 100,000 households brings clarity to both CPS GfK's employees and customers.

"The combined offering enhances the customer value proposition, enabling customers a 360-degree understanding of FMCG and retail customers. We forecast that the acquisition will contribute £60.0m of revenue in FY24E and circa £12.0m of adjusted EBIT," said Berenberg.

The German bank also noted that management had yet to update its medium-term targets to include the contribution of CPS GfK.

"We anticipate it will present the updated medium-term targets, at the earliest, at its H1 results in March. YouGov's shares are trading on a CY24E P/E of c20x, which we see as attractive given the outstanding global growth opportunity, and this acquisition further bolsters its offering to continue to take market share and grow in excess of the underlying mark," said Berenberg. "Shares are trading on CY24E price-to-earnings ratio of c20x, the shares are trading on a c40% discount relative to its five-year average 12-month forward P/E. YouGov is operating in a large fragmented market, it has invested in its platform and product set, and we think it one of the best growth stories in the UK-listed universe."

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, pointing to 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 risks related to 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 650.0p to 600.0p, which indicates 45% upside risk to the current price.