Rentokil’s share price has fallen so far in recent weeks that it's now a 'buy' according to HSBC, even though ‘considerable’ concern remains about the longer-term investment case.
From 610p before its results a month ago, the share price is now 445p and HSBC says on a conservative view of profit progression and of returns after the Terminix acquisition, there is some upside.
The ferocity of the share price reaction to the third quarter results implied slowing growth in the US pest business and that the returns of the combined Rentokil-Terminix business could be delayed or perhaps be in question.
If the issue is not macro but Rentokil/Terminix in origin, as the currently unaffected organic growth at Rollins may suggest, returns cannot be improved as materially as consensus still implies.
HSBC though still sees that over time, there are advantages in the greater route density, better human capital utilisation, synergies, and cash conversion.
Earnings targets have been slashed, but with a new target price of 495p (from 665p), the decline in the share price offers a relatively attractive entry point.
'Buy' from 'hold' is the rating.