Broker tips: Capita, Gulf Keystone, Rentokil Initial

(Sharecast News) - Capita shot higher on Monday as Canaccord Genuity started coverage of the stock at 'buy' with a 900p price target, saying the shares were cheap and should see a material re-rating. It noted that Capita is one of the UK's largest public sector business process services/outsourcing providers and said investors may remember it for "a chequered past, false starts and asset disposals".

"However, we believe its turnaround is at an inflection point now and gaining steam - Public Service (circa 2/3 of group sales) is a healthy outsourcing business with good forward visibility, mid-single digit organic growth and improving margins," Canaccord said.

It said Pension Solutions was "the jewel in the crown", with a solid mid-single-digit growth outlook and mid-teens margins. Meanwhile, Contact Centre was Capita's "problem child", but at around break-even was not a major drag and may be non-core in the future, Canaccord said.

The Canadian bank said Capita was making a big push to infuse leading-edge Tech & Generative AI across all its operations, which should improve customer outcomes, growth prospects, efficiency and margins.

"The shares' 0.17x CY26e EV/Sales, 1.9x EBITDA and less than 4x PE put it materially below key UK peer Serco and global BPS names on 2-3x these multiples," it said. "As Capita delivers on its mid-term guidance of low- to mid-single-digit growth, 6%-8% adjusted EBIT margins and positive free cash, we believe the shares should see a material re-rating."

Analysts at Canaccord Genuity also raised their target price on Gulf Keystone from 210p to 250p as it was set to start crude oil pipeline exports imminently, following the signing of formal agreements with the Kurdistan Regional Government and Federal Government of Iraq after exports had been shut-in since the end of March 2023.

Canaccord Genuity said Gulf Keystone now would have access to immediately higher realised oil prices, with the firm set to receive $16 per barrel in the "interim" period for entitlement oil, which converts to $30/bbl for production oil. It also said that was sweetened by the inclusion of other non-GKP production in the wider process, resulting in an expected >$30/bbl receipt.

"For now, we assume $32/bbl Shaikan pricing to YE25 compared with local sales at $27-28/bbl," said Canaccord. "During this 'interim' period, there will be independent evaluation of invoices leading to reconciliation to full PSC terms at international prices."

The Canadian bank also highlighted the FGI's recognition of the GKP's Shaikan licence and its terms, putting to bed historic uncertainty concerning FGI's non-ratification of various IOC licences in KRI, and the fact that GKP will be marketing its own crude will reduce credit risk

"It will take time for the new sales process to bed in, principally in terms of pricing and payments (there will be some lag on receipts - we expect about two months - compared with no lag for local sales)," said Canaccord, which has a 'speculative' buy rating on the stock.

"But as the systems become established there is also scope for further upside as risks diminish (our risked NPV12.5 valuation = 277p, unrisked NPV12.5 285p). Furthermore, if the pricing discount reduced to $20/bbl (from assumed $25/bbl) our risked NPV12.5 valuation would increase to 302p (unrisked 311p)."

Over at Berenberg, analysts initiated coverage on Rentokil Initial with a 'sell' rating and 284p price target as it recognised the potential for market-level growth in the long term, but said it thinks it's too early for investors to count on an upswing, due to challenges relating to the integration of Terminix.

"In the mid-term, we estimate organic growth will remain below that of the broader market, and we think the North American margin is likely to be flat to down," Berenberg said.

The bank expects Rentokil North America's organic growth to remain subdued for longer than consensus due to the ongoing complexity of the integration of Terminix, with its concerns primarily centred on conversion of lead flow and the replacement of those local leaders who have left Terminix following the acquisition.

The German bank, which said the stock's current valuation was not cheap enough to reflect the task at hand, estimates North America Pest Control organic growth of 2.0% and 2.6% in FY26 and FY27, respectively, versus consensus estimates of 2.7% and 3.7%, respectively.

"In our view, US inflation is a key risk to the cost base, which, when considered in the context of soft growth and increasing investment, could lead to a North America margin decline. We estimate a North America EBITA margin of 16.1% and 15.8% in FY26 and FY27, respectively, versus consensus of 17.9% and 18.6%."