Deutsche Bank downgraded Rentokil Initial Plc (LON:RTO) to "hold" from "buy" on Tuesday and reduced its price target to 465 pence from 505 pence, the broker said. The move came as the stock traded near 459.30 pence at the close, with shares falling more than 2% on the day.
In a research note titled "Crawling back into the woodwork," analyst James Beard said the companys Pest Control category is materially under-earning when compared with leading international peers. That underperformance, Deutsche Bank argued, raises questions about Rentokil's ability to close the gap on both growth and margin metrics.
"Rentokil is a global market leader in an attractive and defensive category, and is a business that we think should deliver growth at least in-line with the industry and a margin profile that befits a market leader in the space," Beard wrote.
The brokerage said it is awaiting further detail from the incoming chief executive on the steps management intends to take to narrow the gap with peers over time. Deutsche Bank cautioned that any increased investment aimed at lifting organic revenue growth - even if judged to be the correct strategic move - could weigh on short-term forecasts.
Deutsche Bank's revised 465 pence target was noted alongside a statement that it "represents a downside of approximately 1.2% to the prior 505 pence target," and the report noted the stock last traded at 459.30 pence.
Context and implications
The downgrade reflects a dual concern from the broker: a Pest Control business that is not delivering comparable margins and revenue growth relative to peers, and a need for clearer strategic direction from Rentokil's incoming chief executive on how management plans to close those performance gaps. Deutsche Bank explicitly flagged the trade-off between investing for organic growth and the potential near-term pressure this could place on the company's forecasts.
The stock reaction on Tuesday - a fall of over 2% - followed the publication of the note and the adjustment to the bank's target price.