The Investment Column: No need to fall out with Friends despite its mixed results

NWF Group; FireOne Group
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The Independent Online

Our view: Hold

Share price: 175p (-6p)

Friends Provident issued a mixed bag of interim results yesterday - good enough to remain upbeat if you're a glass-half-full type of investor, but bad enough to begin getting worried if you're a pessimist.

Although its 9 per cent fall in underlying profits was not as bad as it might sound (mainly due to a series of one-off boosts last year), there are increasing concerns about the group's cash flow, as well as worries about the persistency of some of its customers.

Worse still is the state of F&C, the fund management group in which it owns a 52 per cent stake. F&C unveiled a poor set of numbers on Monday, and conceded times may get worse before they get better.

For each of these worries, however, there is a plausible explanation for the optimist. While cash flow has indeed been tightening, the group has several options for raising capital (such as a securitisation) before it needs to think about a rights issue. Furthermore, the management insists that cash flow is improving, and it may not need to raise any further funds at all.

While persistency has weakened in one part of the group - namely, investment bonds - it remains strong across the rest, and it is too early to suggest this is part of some greater trend.

F&C, meanwhile, has had its new management in place for only seven months - and the contract losses it has recently suffered are a hangover from the previous regime.

Furthermore, prospects for the group outside of the UK continue to look good. Profits at Friends' international business grew 57 per cent during the first half and show no signs of slowing.

Friends has also been at the heart of a recent bout of takeover speculation - and may well find itself on the end of a bid before the year is out.

With Friends' shares trading at a discount to most of its peers, existing investors should certainly hang on in there.

NWF Group

Our view: Take profits

Share price: 875p (-5p)

Three years ago almost to the day this column highlighted NWF Group shares as a bargain at 370p. We were right to do so. The AIM-listed mini-conglomerate posted another set of strong annual results yesterday and saw its stock close at 875p.

NWF is a strange beast. It was formed in 1881 as a farmers' co-operative, but has since diversified and now distributes petrol to forecourts up and down the country and non-perishable goods to supermarkets. There is still plenty of evidence alluding to the group's agricultural roots. NWF owns a number of garden centres and a cattle feed operation.

Yesterday's full year results from the group showed that business is booming across all four divisions. Overall, pre-tax profits for the year to May rose to £5.5m from £4.2m, on the back of a 24 per cent jump in turnover to £293m.

The distribution division enjoyed a strong performance from all three of its sites while the fuels operation experienced a 12 per cent rise in volumes. The animal feeds unit continued to increases its market share and also benefited from an expansion of its product range. Only the performances of NWF's garden centres were a slight disappointment. However, despite a period of tough trading, they are profitable.

NWF shares have had an exceptional 12 months. They have risen by over 80 per cent, outperforming the FTSE All Share by 63 per cent. Since this column tipped them three years ago they have advanced by more than 130 per cent. But back then, the stock traded on a multiple of less than 9 times earnings. Today, it trades at 18 times. Readers would do well to take some profits.

FireOne Group

Our view: Buy

Share price: 233p (+25.5p)

The fortunes of FireOne, the online payment processing firm, are closely bound up with the internet gaming industry, which has been on a rollercoaster this year. FireOne has been described as the "lifeblood of the industry" and its valuation - incredibly cheap at 4.9 times 2006 earnings - reflects the mounting risks faced by online gaming firms in the US, the world's most lucrative market. The recent arrest of the BetonSports chief executive David Carruthers in the US and his indictment along with 10 others has sent shockwaves through the sector. Also, a bill has been making its way through the US Congress that would outlaw all forms of internet gambling and make it illegal for banks, credit card companies and the likes of FireOne to process payments to internet gaming operators.

However, it is unlikely that the bill will become law as there are only 15 working days left before congressional elections in November. Meanwhile, FireOne is steaming ahead. It posted a 98 per cent rise in half-year profits yesterday and was upbeat about the rest of the year. The dividend came in ahead of expectations and there will be a further return of cash to shareholders.

Come October, when the uncertainty surrounding the anti-gambling legislation clears, the shares should take off.

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