Rentokil Initial PLC's (LSE:RTO) results earlier this month are exterminating some of the worries about its acquisition of Terminix in the US, said brokerage Stifel, but the most risky period is coming in the second half of 2024.
In October, shares in the pest control group, which generates around half of its revenue in the US, plunged after it warned that softer trading in North America would mean performance would be “marginally” below previous expectations.
But two weeks ago, the FTSE 100-listed company said it now expects North American organic revenue growth of around 2% in the first quarter and between 2-4% in the full year.
Jefferies, which reiterated a 'buy' rating on Rentokil Initial, maintaining a 600p price target that suggests a 27% upside, said its optimism stems from the company's recent guidance.
Reassurance is also taken from the potential for mild weather to boost pest control activity in the first half of the year.
Terminix focus
Rentokil's strategy for integrating Terminix and realising growth in North America was highlighted as a key factor for the company's future success.
Jefferies pointed to a possible improvement in growth investment traction, alongside an expected growth rate in the upper half of the 2-4% FY24 targets, predicated on US market dynamics and pricing resilience.
However, the note cautions that the company's margin improvement and growth prospects are contingent on effectively managing the integration risks associated with the Terminix acquisition.
Specifically, the integration of branches and routes is anticipated to peak in the second half of 2024, requiring strong execution over the next 12-18 months.
Jefferies also commended Rentokil Initial's performance outside of the US pest sector, noting significant organic growth in Europe and the rest of the world, as well as in the Hygiene/Workwear sectors.
Forecasts were updated, with earnings per share estimates for 2024 to 2026 2-4% lower than previous estimates but 5-7% ahead of the analyst consensus.