Broker tips: Draper Esprit, BAE Systems, The Restaurant Group

Analysts at Berenberg initiated coverage on software and IT services provider Draper Esprit at 'buy' on Monday, stating the company represented a "rare asset class at a rare valuation".

Berenberg said Draper Esprit was "one of the most active venture capital firms in Europe", investing exclusively in European technology companies.

With a typical equity stake in its portfolio companies of less than 10%, though, the analysts stated that Draper did not operate these businesses nor consolidate their financials.

As a result, the German bank said the group's most important KPI was the net asset value of its investments and, with a steady rise in the metric, many investors were "understandably" looking for evidence of valuations.

"Both comparable multiples and Draper's historical returns indicate there is significant upside to not only the current share price, but also the company's reported NAV," said the analysts, which issued the firm with a 680.0p target price.

Berenberg highlighted that Draper has generated an average multiple on its investment of roughly 2.9x since 2016. This, however, rises to 4.0x for its larger investments, namely those companies that have received funds of more than £3m.

We, therefore, believe the core portfolio could be worth more than £800.0m alone if its return on investment multiple holds firm," said Berenberg.

"The time value of money must be taken into consideration here, but, even so, the company's portfolio valuation is still highly conservative."

Analysts at Credit Suisse reiterated their 'overweight' stance on shares of BAE Systems, highlighting the continuing perception by countries that threat levels remain elevated and in anticipation that the dividend payout would be maintained, even if with a bit of a lag in the case of the latter.

A number of global geopolitical hotspots would continue to drive a "heightened perception of threats" which should limit any downside pressure to the US defence budget, with exports to "a number" of countries feeling exposed to such threats likely to derive support.

Regarding the dividend, the Swiss broker highlights BAE management's recent confirmation that its capital allocation was unchanged and, as a result, its expectation was that the 2019 final dividend would be paid in full alongside the engineer's full-year results on 30 June. Payment of the 2020 interim dividend meanwhile would be postponed until February 2021, they added.

Nonetheless, on the back of the company's second quarter trading update published on 25 June, they reduced their estimate for its earnings per share in 2020 by 5%, forecasting less catch-up in its Electronic Systems and P&US units in the tail end of the year.

Among the main risks to watch out for, Credit Suisse pointed out changes in the outlook for the US defence budget, the exchange rate between the US dollar and the pound, its ability to execute on projects and large export orders.

Citi kept its 'buy' rating on The Restaurant Group but cut its target share price by a quarter with uncertainty about consumer behaviour hanging over the restaurant sector.

The UK government is allowing pubs and restaurants to reopen on 4 July subject to relaxed social distancing rules. Citi said the timing was expected but that openings would be phased over coming weeks starting with pubs.

Advising clients to "take the medicine then wait for the recovery" Citi analysts left their 'buy' rating intact but reduced their price target on The Restaurant Group shares to 75p from £1. They estimated it would take until the 2022 financial year for revenue per site to be restored.

The analysts cut their estimates for earnings before interest and tax by 61% for 2021 and 29% for 2022.

"The reduction of the social distancing requirement from 2m to 1m should enhance industry capacity utilisation from c30% to c70% but the unknown element will be consumer appetite to visit restaurants," Citi's James Ainley and colleagues said in a note to clients. "Upside and downside risks [are] apparent."

Citi published its note on the day The Restaurant Group announced creditors had voted for a company voluntary arrangement that will close 125 poorly performing eateries and allow the company to renegotiate rents and leases with landlords. The group is closing branches of tired brands such as Frankie & Benny's and Chiquito's to concentrate on Wagamama, the popular chain it bought at the end of 2018.