Jefferies downgrades fully valued Rentokil
Analysts at Jefferies chose to downgrade their stance on pest control firm Rentokil on Tuesday, saying that the group's accelerated growth had brought it to full valuation and moved the stock from 'buy' to 'hold'.
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Jefferies commended the accomplishments of Rentokil's management and said it maintained a "positive view on the company", but believe the stock's recent rally had resulted in a full valuation.
However, Jefferies, which chose to increase its price target on Rentokil ahead of its July interims in order to account for an uptick in growth and underestimated operating leverage, saw "insufficient upside" to maintain its 'buy' rating, and subsequently, downgraded the group from 'buy' to 'hold'.
While year-over-year growth rates are likely to fall, Jefferies expects sequential acceleration in the organic growth of Rentokil's pest control unit and feels that consensus earnings per share estimates had underestimated the improvements to the firm's operating leverage.
"We forecast 17% FCF growth in 2018, primarily driven by the Haniel Joint Venture’s inaugural dividend. When combined with organic growth, we believe this provides comfort to Rentokil’s ability to achieve its medium-term guidance targets," added Jefferies.
The broker also added that in its first-quarter report, Rentokil flagged a £10m-15m currency headwind to its adjusted pre-tax profit. Given the rally of the USD versus GBP, Jefferies now believes that £5-£10m was "more reasonable".
Jefferies upped its price target on Rentokil to 340p from its previous 380p mark.