Broker tips: Diageo, Tullow Oil, Restaurant Group

Analysts at Credit Suisse reiterated their 'outperform' recommendation for shares of Diageo, telling clients that they spied "upside risks" to the spirits-maker's US and Asia Pacific businesses.

They also pointed out upside of at least £2bn to the company's plans for buybacks and mergers and acquisitions thanks to net debt standing at 2.2 times' its earnings before interest, taxes, depreciation and amortisation, versus a leverage target of 2.5-3.0 times.

Foreign exchange tailwinds also saw them revise their estimates for Diageo's earnings per shares over fiscal years 2023-25 up by 7% in the wake of recent weakness in sterling - and possibly a bit more.

Concerning the first point, they explained that Diageo was gaining market share, in a US spirits industry that had been growing at a clip of 5-6& in recent months, thanks to its over indexation to the fast-growing Tequila category.

A restriction-free Thanksgiving and Christmas might also bolster growth in US spirits across the fourth quarter.

"DGE trades on calendarised 2023E [price-to-earnings multiple] of 19x, a 5% premium to European consumer staples (down from 20%).

"We think US growth upside should re-rate the stock. Risks include a significant macro shock to the US consumer and higher cost inflation."

Jefferies downgraded Tullow Oil on Wednesday to ‘hold’ from ‘buy’ and cut the price target to 48p from 77p.

The bank said Tullow’s interim results brought back into its investment view what it sees as the limitations of Ghana production improvement at the Jubilee field and TEN field.

"This, alongside more limited deleverage than (North Sea) peers and a proposed Capricorn Energy merger that has been withdrawn, means we move Tullow to a core NAV-based price target method of 48p a share and downgrade to hold.

"In simple terms, we view the circa $200m free cash flow that Tullow estimates in 2022 at $95/barrel oil price as an approximate annual limit of deleverage for the company."

Jefferies said that because capex must continue at least at current levels to maintain drilling intensity, it does not see a step change in production either way and Tullow has no immediate exposure to the bank’s increased gas price assumptions.

Berenberg downgraded Restaurant Group on Wednesday to ‘hold’ from ‘buy’ and slashed the price target to 35p from 65p, sending shares in the Wagamama owner tumbling.

On a three-year view, the bank still expects TRG shares to perform well, as some cost pressures such as energy reverse, competitors exit the market, the consumer recovers, and the company ultimately "benefits from being a survivor".

However, in the short term, Berenberg noted that huge energy inflation has driven large earnings downgrades, meaning that the shares still do not look cheap.

"With few positive catalysts ahead, we downgrade our rating to hold," it said.

Berenberg said the company’s sales outlook is uncertain.

"While TRG blamed the heatwave and a moderation in delivery sales for the marked slowdown in like-for-like sales growth across its divisions in Q3, we have some concerns that this may also be an early indicator of a softening trend in demand, which is not currently baked into consensus," it said.