Interactive Investor

FTSE 100 shares round-up: BT, Rentokil and L&G

UK stocks continue to attract the attention of international billionaires; BT now has two of them. City writer Graeme Evans has updates on this trio of blue-chips on the move.

13th June 2024 14:13

by Graeme Evans from interactive investor

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A new billionaire on the BT Group (LSE:BT.A) shareholder register today ensured the telecoms giant resumed its recovery as the best-performing FTSE 100 stock of the past month.

The shares rallied over 3% to almost 134p after yesterday afternoon’s disclosure of the 3.2% stake by Mexico’s Carlos Slim, whose family controls Latin America’s biggest mobile telecoms firm.

His interest in BT has been viewed as a vote of confidence in the strategy of new boss Allison Kirkby, particularly after her improved results-day guidance on free cash flow underpinned a recent recovery for the shares.

BT is up 22% in the past month but remains lower than the peak seen in May last year of 158p, which came shortly after the French telecoms billionaire Patrick Drahi increased his stake to more than 24%.

Despite the positive reception to February’s full-year results, UBS today warned of a potential repeat of autumn 2023 when shares rallied 20% only to then derate 25%. It continues to have a “Sell” recommendation and a price target of 110p.

The Swiss bank said: “BT is cutting back on capex to boost free cash flow [FCF] but this may not be sustainable longer term and the boost to FCF may only be temporary.”

Yesterday’s BT stake building by the world’s 17th-richest person came on the same day that Rentokil Initial (LSE:RTO) shares surged 14% due to the interest of another billionaire, the US-based activist investor Nelson Peltz.

His vehicle Trian Partners has taken a top 10 shareholding position in the pest control firm, whose integration of major acquisition Terminix has been hampered by weak US demand.

The development reignites speculation around a potential shift in Rentokil’s primary listing to the US, given that is what happened at plumbing supplies firm Ferguson after Trian took a 6% stake. The focus will also be on the prospect of divestments of non-pest control assets.

US bank Jefferies, which has a “Buy” stance, believes the presence of the new shareholder will be an unwelcome distraction for management as they focus on dealing with the risks of the Terminix integration and on improving US growth.

It adds that the valuation gap to Rentokil’s US rival Rollins Inc (NYSE:ROL) looks overdone and should narrow as the integration plan progresses. The FTSE 100-listed company trades on 17.5 times 2024 earnings, falling to 13.1 times based on 2026 estimates.

Jefferies has a price target of 600p, compared with today’s 466.7p after shares fell back 5.5p.

The bank’s support is built around the earnings upside from synergies and the underlying earnings power of the combined Rentokil/Terminix business. It adds: “The emergence of an activist investor stake may have the potential to accelerate a re-rating, but near-term focus remains on Terminix integration and accelerating US growth.”

Other fallers in today’s lacklustre blue-chip session included Legal & General Group (LSE:LGEN), which dropped another 2.9p to 226.9p amid the City’s underwhelmed response to the capital return plans of new chief executive Antonio Simoes.

The shares fell by more than 5% yesterday as he forecast £200 million a year of share buybacks and 2% dividend growth from this year. This replaces the previous dividend policy of 5% under predecessor Nigel Wilson, who spurned buybacks in favour of investment.

UBS today highlighted L&G's growth ambitions in high margin private assets and infrastructure as one of the most interesting developments in yesterday’s strategy update.

It said: “L&G's ambition to grow private assets from £48 billion to £85 billion by 2028, and the increased near-term cost to achieve this, make this element of the strategy key for L&G's long-term re-rating.”

UBS cut its earnings forecasts and price target to 240p, whereas Bank of America has upgraded L&G to a “Buy” recommendation with a 268p price objective.

It points out that L&G is investing in growth, which should lead to cash generation ramping up in the outer years at the expense of near-term payouts — albeit with a 9.3% dividend yield projected for 2024.

The bank said: “We think L&G made the right decisions for the long-term, even though this led to short-term disappointment at its capital markets day yesterday.

“We think the weakness more than reflects the long-term nature of L&G's investment thesis and leave a stock with market-leading operations and attractive long-term growth prospects.”

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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