Rentokil Initial PLC (LSE:RTO) reported organic growth of 5.9% in the first quarter of 2023, ahead of analyst consensus of 5.3%, but it isn’t enough for UBS to shake its ‘sell’ rating.
The Swiss bank forecast steady growth over the next few years for the pest control service, with sales expected to jump by 56% to £5.7bln in 2026.
Earnings before interest and taxes are predicted to shoot up 77% in the next four years to £965mln from £545mln in 2022, UBS believes.
Even net debt, which reached £3.2bln in 2022 following the acquisition of US-based rival Terminix, is expected to continue falling over the coming years supported by an EBIT margin hovering around 15%.
The acquisition, which cost US$6.7bln, is expected to offer cost synergies of US$60mln in 2023, before increasing to as much as US$200mln by 2025, according to analysts.
The Crawley-based group continues to explore additional mergers and acquisitions, with £250mln targeted for 2023 purchases.
UBS also noted that Rentokil trades at a 22x price-to-earnings ratio and a 19x EV/EBITDA multiple, which the bank insists is “at the top end of the sector”.
The investment bank does see some risks in the business, however, potentially warranting the sell rating.
Firstly, it believes the group’s exposure to European markets could be an issue do the volatility of the area and it being a crowded market, which could place pressure on pricing power.
Without pricing power, it argues the group could be vulnerable to margin pressure if inflation increases costs for staff, fuel, and garments.
Considering this, UBS targets the share price to sink to 460p in the next twelve months, a 22% downside to the 594p value the stock opened on Thursday.