The Investment Column: Man is very much alive and kicking

Overdraft worries weigh on Johnson Service; Time to take profits at the Restaurant Group
Click to follow
The Independent Online

Man alive! Not, as had been predicted, Man Overboard!

Man alive! Not, as had been predicted, Man Overboard!

Speculators bet on the wrong headline when Man Group, the hedge fund manager, said it would announce - for the first time at this time of year - its latest "funds under management" figure, the amount of cash it manages on behalf of clients.

The shares fell on Monday but quickly reversed on yesterday's news, which was that the company raised $2.2bn (£1.2bn) from wealthy individuals and institutional investors across the globe in the final quarter of 2004. And because the money it has invested did well, the total funds under management figure was a better-than-forecast $42bn, up from $38.4bn on 30 September.

In the main, Man runs "funds of funds", funds whose cash is in turn invested in smaller hedge funds and other exotic investment vehicles. Because shares and bonds are prone to bear markets where investors can lose a large chunk of their money, investors ought to put at least a little into hedge funds, which are focused at all times on making absolute returns. So far, less than 2 per cent of investment is made in hedge funds, and Man is not being silly when it predicts that could quintuple in a decade.

Sceptics often sniff at the hedge fund phenomenon, and at Man, its most vocal cheerleader. "I don't believe they have invented a new way to make money," they say. But they have. Their underlying funds are picked precisely because their managers have an innovative investment strategy or efficient computer program for identifying investments, and all the while new financial instruments are being invented for trading - for example, carbon emissions or weather derivatives.

This is a long-term growth company, even if the speed of take-up of hedge fund investment and the returns that hedge funds can generate may not continue at quite the cracking pace of recent years. Man's shares still trade on a mundane 12 times next year's conservative earnings forecast. They will always be a volatile investment (speculators have pushed them lower because Man's core AHL fund has had a bad few weeks - it was betting on the dollar continuing its fall), but they remain firmly a long-term buy.

Overdraft worries weigh on Johnson Service

When Stuart Graham was appointed chief executive of Johnson Service in mid-2002, the Merseyside-based overalls and dry cleaning group was - to put it politely - a dog's breakfast of a company.

Its core business loaning overalls seemed doomed to decline alongside Britain's manufacturing base, while it also had problems with acquisitions and was suffering with a pension fund black hole. The business was simply not operating efficiently enough, despite the obvious synergies available from dry cleaning and clothing rental.

Mr Graham has been deal-doing at a frenetic pace, reducing the workware business to a quarter of the group. "Corporateware", uniforms for the likes of Tesco and HSBC, has become more important.

Meanwhile, Johnson Cleaners, the dry cleaning chain, has been bolstered with the acquisition of the Sketchley chain for £1. And a whole new string has been added in facilities management, running corporate buildings for the likes of Cable & Wireless, hiring the cleaners and the maintenance staff.

A trading update yesterday confirmed "conditions in the workwear rental market continue to be competitive", but there it is winning market share from rivals and turnover may stabilise. The £22.5m acquisition of Dewhirst Corporate Clothing (more bank uniforms) allows for further economies of scale, but the real prospect for growth lies in Europe. Unfortunately, the group is up against the top of its overdraft.

At 435p, the share price rating is at the top end of the support services sector, and this seems a good moment to take profits.

Time to take profits at the Restaurant Group

The trading update from The Restaurant Group yesterday was as cosily familiar as the menu at its Garfunkels or CafféUno restaurants.

For starters, an encouraging performance from its leisure parks outlets, the ones outside cinemas and bowling alleys and the like, where competition is low and its expanding Frankie & Benny's chain of American diners is often the only option on the parking lot.

For the main course, particularly strong training in "concessions", mini-restaurants that it has opened at train stations and at airports, where no-frills fliers need to fill up before their meal-less journey.

But for pudding, a rather stale performance from the high street outlets. The tex-mex chain Chiquitos appears to be underperforming. Competition in this area is tough at the best of times, and not all The Restaurant Group's formats have obvious growth potential. The worry is that if consumers draw in their horns this year, this part of the business could go backwards.

So while another highly satisfactory set of full-year results is on the menu, the outlook beyond that is less clear. We were positive on the shares throughout last year, but they are starting to look a little stretched on 17 times 2005's risky forecasts. At 124p last night, those who have followed our advice should lock in their profits.

Comments