Morgan Stanley cuts Rentokil on tougher U.S. pest-control competition

Investing.com -- Morgan Stanley downgraded Rentokil Initial to “equal-weight” from “overweight” and cut its price target 16% to 420 pence from 500 pence, citing tougher competition in the U.S. pest control market and lower valuation multiples among peers.

The brokerage said private equity-backed operators have rapidly expanded their share of the U.S. market, increasing competition for Rentokil and rival Rollins. Private equity firms now account for more than 16% of revenue among the top 100 pest control companies, up from 1% a decade ago, Morgan Stanley said. Rentokil and Rollins together account for 51%.

PE-backed platforms are also growing faster than listed operators, narrowing the route-density advantage enjoyed by Rentokil and Rollins, the brokerage said.

Private equity’s growing presence has also driven up acquisition valuations. PE-backed buyers accounted for more than half of U.S. pest control transactions over the past three years, compared with less than 10% a decade earlier. Average deals now command 2.5 to 3.5 times enterprise value to sales, versus 1 to 2 times between 2005 and 2015.

Rentokil has cut its 2026 acquisition spending guidance to about $120 million from roughly $200 million, Morgan Stanley said, limiting another potential avenue for growth.

The brokerage also flagged a potential challenge from changes in online search. In a test across 25 U.S. markets, independent operators accounted for 79% of 150 top-three recommendations generated by large language models, compared with 8% for Rollins and 7% for Rentokil.

Morgan Stanley said this could weigh on Rentokil’s growth recovery, which relies partly on customer acquisition and digital lead generation.

Rentokil shares have fallen more than 30% since June. Morgan Stanley said it saw limited scope for a near-term re-rating, pointing to expectations for a weak third-quarter update and a lengthy turnaround under new CEO Mike Duffy. The company is due to report a third-quarter trading update on Oct. 22.

Rentokil’s adjusted EBITA margin was 15.5% in fiscal 2025, compared with 22.4% for Rollins, according to the note.

Morgan Stanley maintained an “overweight” rating on Rollins but cut its price target to $45 from $60, citing its multi-brand, multi-channel model as a potential advantage as search behaviour changes.

For Rentokil, Morgan Stanley identified faster U.S. organic growth and quicker execution of its strategic plan as potential upside risks.

Original Article

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