Credit Suisse downgrades Rentokil to 'neutral'
Credit Suisse downgraded Rentokil Initial to ‘neutral’ from ‘outperform’ on Tuesday, cutting the price target to 450p from 460p.
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The bank pointed to stable growth but FX headwinds, slower margin accretion and diminishing US pest opportunities. It cut its earnings per share estimate for 2019 by 1% and for 2020-21 by 7-9% to reflect the impact of FX as sterling has strengthened and a more cautious view on the company reaching its 18% margin target for North America by 2021.
"We think Rentokil can continue to generate around 4% organic revenue growth, margin accretion and recycle excess cash into value creative M&A," it said. "The vast majority of its end markets are innately stable providing the opportunity to compound low-volatility value in the medium to long term."
However, CS said it sees challenges from FX headwinds in the near term and rising wage costs in the US, that have seen Rollins break a multi-year winning streak of margin growth in the past two years.
"This will, we think, add incremental challenges to reaching its 2021 North American margin target," it said.
"Given the combination of falling forecasts, slowing group margin growth, declining US M&A opportunity set and a PE of 29.2x we downgrade to neutral," CS said.
It prefers Bureau Veritas, Teleperformance and Eurofins.