Berenberg reiterates 'sell' rating on Rentokil despite US growth beat

(Sharecast News) - Analysts at Berenberg nudged up their target price on 'sell'-rated Rentokil from 284p to 300p on Tuesday, but still warned that underinvestment was threatening mid-term growth. Rentokil reported its third-quarter revenue and growth figures in late October, and Berenberg noted that while the stock rallied due to accelerated organic growth of 1.8% yoy in US Pest Control, up from 0.3% year-on-year in Q2, it said the beat was driven by strong one-off jobs, likely due to a warm summer in the US, which will reverse to more normalised levels in Q4, in its view.

Berenberg also noted that organic growth from contract revenue continued to appear "weak", while International division organic growth fell short of expectations.

"The reporting period solidifies our bearish view of Rentokil, with upcoming headwinds to growth and profitability through the resumption of integrating Terminix likely to lead to pressure on employee retention, alongside a need for investment to improve service levels," said Berenberg.

"Our 'sell' call has clearly been at odds with investor sentiment. In our view, strategies employed thus far by Rentokil cannot meaningfully move volume growth into positive territory, as strategies do not relate to the improvement of service levels, essential to the bull thesis."

Reporting by Iain Gilbert at Sharecast.com