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Rentokil worth catching for HSBC as pest control lifts profits
With Rentokil Initial continuing to strengthen its pest business through strong organic growth and acquisitions, analysts at HSBC decided to upgrade the firm to 'buy' on Monday.
As Rentokil had altered its business mix at a "much faster pace" than HSBC had anticipated to become a purer pest control player, the bank pointed to an upside in if the company continued such a transformation.
"We believe this is likely as it is consistent with management's stated strategy. If the company achieves the targeted 8-10% per annum revenue growth from acquisitions and manages to dispose of its protect and enhance businesses, the high-return and high-multiple pest control business should account for circa 80% (versus 69% in 2017) of EBITA by 2020," the analysts said on Monday.
HSBC highlighted the fact that the mix, route density and cost savings from such acquisitions should help the company to improve its margins by 100-200bps.
The bank also noted that if Rentokill was capable of maintaining its present rate of growth, aided by acquisitions, it saw a 35% potential upside to the firm by 2019, leading it to up its target price on the group from 290p to 440p.