Rentokil Shares: Risk/Reward Continues to Build to the Downside

Bernstein cut its rating for Rentokil Initial (LON: RTO) from Market Perform to Underperform in a note to clients this week.

The firm warned investors that the risk/reward balance is increasingly skewed to the downside. Bernstein also cut its price target on the stock from 365p to 300p a share.

“The business now has job openings for a North America CEO and group CEO, which points to challenges in the scale and duration of the U.S. Pest turnaround,” Bernstein analysts said. 

They added that Rentokil’s strategy on store numbers and branding “has drastically shifted,” signalling broader uncertainty around the company’s direction.

Furthermore, Bernstein expressed concern about the quality of Rentokil’s U.S. Pest business revenues, noting a potential deterioration in the higher-quality recurring revenue segment in the first quarter. 

“One-time jobbing revenues have been supportive,” the note said, suggesting that underlying performance may be weaker than headline numbers imply.

Despite some upside risk from potential asset sales or activist involvement, Bernstein warned of persistent earnings headwinds and deteriorating quality. “We see earnings risk and deteriorating earnings quality,” the analysts stated. 

“This drives our EPS estimates 6–15% below consensus.”

The downgrade follows a period of pressure for Rentokil as it faced declining demand. Its shares have fallen around 14% in the last 12 months but are way off their 2023 highs of over 600p, currently trading around the 350p a share mark.