Rentokil Initial PLC (LSE:RTO) shares are undervalued following its “transformational” proposed acquisition of Terminix, according to Jefferies.
The broker placed an upgraded 675p price target on the British pest-control business, up from a previous target of 650p, representing 39% upside.
“We are positive on the deal, believe strategically it makes sense and see significant upside to synergy targets and deal economics, which may be underappreciated by the market,” it said.
The December agreement for Rentokil’s US$6.7bn acquisition of US-based Terminix is regarded as “transformational” by the broker, noting it would increase Rentokil’s share of the global pest-control market to 27%.
“It also addresses key questions around how quickly Rentokil can build out its Residential pest coverage, provides further scale to overlay benefits from investments in IT, digitalisation and technology, positive for margin, and offers additional levers to help manage the increasing challenges of cost inflation.”
Rentokil’s share price is down more than 14% in the last six months, most heavily impacted by the announcement of the proposed deal that analysts perceived as excessive.
But Jefferies said the underlying quality of Terminix’s business, the planned turnaround that would be accelerated with Rentokil’s support, and general synergy targets and deal economies may have been underappreciated.
Jefferies’ valuation includes forecast organic growth of 3% through 2022 with expected annual M&A activity of £300mln.
The broker said some downside exists as Rentokil gives up the disinfecting economy which grew lucrative through the height of the COVID-19 pandemic.