UBS has reiterated its 'buy' rating on Rentokil Initial PLC (LSE:RTO) following a meeting with the pest control group's new chief executive, arguing the reaction to second-quarter results has created a sharply positive risk-reward skew.
The bank keeps its 480p price target, implying 35% upside from 370p, against an upside case of 640p and a downside case of 280p.
Analysts Nicole Manion and Rory McKenzie came away describing the incoming chief executive's plans for North America, which generates around 70% of group earnings, as sensible if still light on detail.
New performance measures, the future reporting structure and the cost of delivering savings all remain to be settled.
The central issue is volume growth in North American pest control, where growth slowed by 40 basis points in the second quarter and UBS has now pushed its expected recovery back to the second half of 2027.
Management believes changes to the residential business over the past year have improved competitiveness, but says more investment in the salesforce is needed, and acknowledges that the focus on residential has come at the expense of commercial execution.
Splitting the two operations, with separate profit and loss responsibility, is the first step.
Rentokil dropped its target of a North American margin above 20% by 2027 last week, which UBS notes was never in forecasts but removed a floor under profitability.
Management says the target remains achievable in the medium term but requires a sustained volume inflexion.
Higher North American spending can be funded from savings elsewhere, leaving the shape of group margins unchanged.
The shares trade on about 14 times forward enterprise value to earnings before interest, tax and amortisation, against a long-run average of 18 times, which UBS calculates implies no premium at all for the North American pest business.
