Berenberg starts Rentokil at 'sell', points to challenges with Terminix integration

(Sharecast News) - Berenberg initiated coverage on Rentokil Initial on Monday with a 'sell' rating and 284p price target. The bank 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 said it expects Rentokil North America's organic growth to remain subdued for longer than consensus (Visible Alpha) 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 that have left Terminix following the acquisition.

It estimates North America Pest Control organic growth of 2.0% and 2.6% in FY26 and FY27 respectively, versus consensus of 2.7% and 3.7% respectively.

"In later years, we give credit to Rentokil for accelerated growth, but we think the business will require investment to achieve that," it said. "Coupled with this, Rentokil's US cost inflation has historically matched growth in the US CPI, while broader pest control salary cost inflation has exceeded the CPI.

"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%."

Berenberg said the stock's valuation is not cheap enough to reflect the task at hand.

At 1015 BST, the shares were down 0.7% at 367.10p.