Market Report: Bullish broker helps Rentokil's advance

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The Independent Online

Rentokil Initial strengthened last night after a broker outlined a path to recovery which could put the pest control-to-parcel delivery company's shares higher in the coming months.

Lower administration costs, coupled with a focus on growth initiatives, could drive Rentokil's share price to its bull case valuation, or up to 200p, a level not seen since 2004, said analysts at Morgan Stanley

"First is the project to lower group-wide administration costs, which are currently £500m, or 21 per cent of revenue," the broker said. "Our peer benchmarking suggests a reduction of £100m might be achievable (versus the £35m in our base case), which would add 27p to our valuation. Second, management attention is now turning to growth initiatives which could be worth 45p on today's share price. We expect more details on both at the third-quarter results in November."

As it waits for the update, the broker issued a series of forecast updates on the back of Rentokil's second-quarter results. Morgan Stanley also raised its target price for the shares, from 90p to 115p, driven in part by the forecast upgrades and by a higher assumed multiple on near-term earnings in light of evidence that Rentokil's recovery plan was working. At the close, the stock was up 3.3 per cent, or 3.3p, at 104.9p – its highest price this year.

Overall, the FTSE 100 held on to earlier gains, rising by 41.03 points to close at 4731.56, while the FTSE 250 rose by 43.91 points to 8421.46, its highest level since September last year. Despite the slight increase, sentiment among traders was generally positive following the release of key US unemployment data, which revealed that American employers cut 247,000 jobs in July. Analysts had expected non-farm payrolls to drop by 320,000, which would have pushed the unemployment rate in the world's largest economy to 9.6 per cent. Instead, it eased to 9.4 per cent last month from 9.5 per cent in June.

Defensives were in favour across the Footsie as investors moved to bank profits elsewhere. The likes of British American Tobacco, which was 33p ahead at 1869p, AstraZeneca, which was 70p stronger at 2792.5p, and BAE Systems, was which was 4.1p firmer at 320.6p, traded higher as investors secured gains in parts of the mining sector, where the Eurasian Natural Resources Corporation eased down 31p to 848.5p, and the commercial property sector, where Land Securities retreated to 595.5p, down 15p.

Not everyone was held back, with miner Antofagasta rising 6.5p to 732.5p and its rival Kazakhmys up 9p at 930p. Nomura urged investors to go long on the two stocks and hedge their bets by shorting Boliden, the Swedish miner. Barclays Capital also weighed in, raising its target price for Antofagasta from 650p to 750p, and for Kazakhmys from 800p to 1100p.

Elsewhere, Rolls-Royce failed to make much headway, closing broadly unchanged at 424.4p, an increase of 0.3p, after Goldman Sachs switched its stance to "sell". It said that while it believed the civil aerospace downturn was likely to be less severe than many investors anticipated, the shares had gone too far relative to their peers. "The shares now trade on a significant premium to its peers Safran, Meggitt and MTU," the broker said.

Goldman also highlighted the potential for negative defence-related newsflow, saying: "The new US administration is trying to cancel the GE/Rolls-Royce engine for the new F-35 fighter. Further, the UK is reportedly considering cancelling an order for the version of the F-35 where Rolls-Royce has the highest content." Meanwhile, there was little love for Royal Bank of Scotland, which took the wooden spoon the benchmark index, falling 12.1 per cent or 6.46p, to 46.99p after it posted interim results for the first half. Last night's fall wiped out the paper profit clocked up by taxpayers after Thursday's gains.

Across the rest of the banking sector, investors moved to secure gains in Lloyds, which came off the boil and closed down 2.6 per cent, or 2.7p, at 102p. Barclays, which was up 3.1 per cent, or 11p, at 365p, HSBC , which rose 6p to 667p, and Standard Chartered, up 9p at 1374p, also managed to avoid the downdraft.

On the second tier, Ladbrokes rose by 3.3 per cent, or 5.7p, to 176.8p, thanks to Goldman Sachs, which moved the stock from "sell" to "neutral", saying that following recent underperformance the stock was trading below its revised six-month target price of 195p, leaving the risk-versus-reward picture looking "evenly balanced". Goldman also weighed in on the housebuilder Bovis Homes, which was 4p ahead at 508p, despite the broker moving it from "buy" to "neutral" in light of the stock's outperformance. "We continue to believe Bovis's lower financial leverage relative to the average housebuilder reduces the downside risk to its tangible net asset values," the broker said. "However, the current share price now reflects this in our view."

The wider housing sector was subdued as investors took profits at the end of a positive week, pushing Redrow to 194.2p, a fall of 4.1p, or more than 2 per cent, and Barratt Developments, which was down 1.3 per cent, or 3p, at 222p. Taylor Wimpey was also weak, easing back to 38p, a reduction of 3.2 per cent, or 1.25p.