The recent share price rally in rat-catcher Rentokil Initial PLC (LON:RTO) has prompted Jefferies to downgrade the stock to ‘hold’.
The broker has cranked up its price target to 380p from 340p; Rentokil’s shares currently trade at 343.5p, up from 313p at the start of the year and 274p a year ago.
READ: Rentokil Initial's price target raised by Credit Suisse despite merger setback
“We commend the accomplishments of management and maintain a positive view on the company, but believe the stock's rally has resulted in a full valuation,” the broker said, ahead of the company’s interim results on July 30.
The interim results will probably see year-on-year growth rates fall but should see quarter-on-quarter improvements.
Organic growth on the pest control side of the business in the first quarter of 2018 was hampered by Puerto Rico, where the group’s operations were still recovering from the impact of September’s hurricane, and also by a prolonged winter, which meant the pests took longer to come out to infest than they usually do.
While Puerto Rico is not expected to recover until the second half of this year, Jefferies expects that the adverse impact from the weather will have partially abated in the second quarter.
It is forecasting second-quarter organic growth of 3.3% in pest control, up four-tenths of a percentage point on the first quarter.
Foreign exchange headwinds have eased considerably since the time of the first quarter trading update; at that time, Rentokil’s management was flagging up a £10mln to £15mln hit to adjusted profit before tax but since then the greenback has rallied against the pound and Jefferies now believes £5mln to £10mln “is more reasonable”.