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Broker tips: BHP, Draper Esprit, Quixant

Bank of America Merrill Lynch downgraded BHP to ‘neutral’ from ‘buy’ on Wednesday and slashed its price target on the stock to 1,900.0p from 2,900.0p as it said earnings downgrades were coming.
The bank said China growth was disappointing, noting that China steel production cuts had pushed iron ore into surplus and downgraded its iron ore forecast for 2022 by 45% to $91/t. It also cut its copper price forecast by 21% to $9875/t.

The bank explained that China’s policy to “force” steel production down 10% during the August-December period put the iron ore market into surplus.

“Barring a change in this policy stance, we don’t see any reason why iron ore shouldn’t trade down to marginal cost (c. $80/t), particularly as ‘blue sky’ policies loom in early 2022 for China’s winter Olympics,” it said.

“While we are concerned on the sustainability of China’s approach to steel in terms of the wider impact on growth and economic stability, we can’t argue with the facts as they stand and downgrade recommendations on several iron ore producers, including BHP.”

To be clear, the bank said it doesn’t see BHP shares as expensive, stating an enterprise value/underlying earnings weighting of circa 4x and a free cash flow yield of around 15% felt like “compelling value”.

Analysts at Berenberg raised their target price on software firm Draper Esprit from 1,000.0p to 1,200.0p on Wednesday, stating the group was “continuing to move in the right direction”.

Berenberg said Draper Esprit, which it selected as a top pick for 2021, had “not disappointed” thus far, yielding a return of 65% year-to-date and outperforming the FTSE 250 by 53% and the US and European tech indices by around 45% and 37%, respectively.

The German bank also highlighted that since June, markets had pushed on as valuations continue to expand in the technology sector, noting that this, combined with some new investment updates, gives it confidence that the company will outperform prior estimates with more capital deployed and the company achieving higher uplifts to its portfolio fair value.

“At this stage, we make no changes to realisations particularly as there is no obvious candidate for a short-term initial public offering and or trade sale,” said Berenberg, which reiterated its ‘buy’ rating on the stock.

“At the group level, our net asset value per share estimates move up by 2-3% and we raise our price target to 1,200.0p to reflect a slight expansion in TMT multiples globally to circa 6.3x enterprise value/sales.”

Analysts at Canaccord Genuity reiterated their 225.0p target price on technology outfit Quixant on Wednesday, citing some “encouraging progress” despite margin headwinds.

Canaccord said Quixant’s interims, with a 31% jump in first-half group revenue to $36.5m, represented 52% of its full-year revenue expectation for a “typically H2 weighted” business.

The Canadian bank also stated it demonstrates a “buoyant recovery” in gaming and the strategic focus on human machine interaction for broadcast at Densitron.

“To this point, the strength of the gaming proposition helped secure five new business wins in H1 (including a self-serve betting terminal project with BetConstruct taking new wins over the last 15 months to 11) while a first lease agreement was launched in H2 with a long-term Gaming client,” said Canaccord, which also added there were 61 broadcast customers in final stage approval within the Densitron pipeline.

As a result, Canaccord said order intake provided 115% order coverage against full-year management revenue expectations alongside improved visibility into 2022 to provide encouragement on the outlook.

However, Canaccord added that while management also anticipates adjusted pre-tax profits in line with its expectations, supply chain headwinds had temporarily compressed first-half gross margins to 30% despite strategic actions on inventory mitigating the impact, with the trend also likely to continue into 2022.

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