The FTSE 100 group is up more than 20% since the start of 2020 on its offer of defensive growth from a global expansion of its pest control business as well as exposure to the coronavirus-associated theme of hygiene.
Analysts at the Swiss bank said the rise in the shares to a point where they are changing hands for around 35 times forecast 2021 earnings.
However, this “prices in an acceleration to high-teens EBITA growth”, whereas they only see potential for compound annual growth in the low-teens for the mid-term, 50-50 split between organic growth and acquisitions.
The analysts expect organic growth of the Pest business to slow in the key commercial segment, do not believe the North America business will be able to achieve its margin targets, and see limited mid-term hygiene expansion.
While they expect pandemic-related demand to boost organic growth the 2020 and 2021 financial years of around 8% per year, “beyond this we expect a slowdown towards a ‘new normal'” of just above 3.5% a year compared to a historic rate of nearer 2.5%.
“Rentokil’s Hygiene exposure is circa 85% in mature, GDP-dependent markets, and shifting this portfolio to gain scale in the US/Asia would require higher capital investment (that we believe would earn lower returns than in core Pest).”
Overall, UBS’s forecasts initial forecasts as they begin coverage of the stock are 6% below the wider analyst consensus for 2022.
Even factoring-in GBP300mln per year of M&A into a discounted cashflow valuation the analysts accompany their bearish rating with a 460p price target that is 18% below the last close price.