Investment Column: Centrica is showing very good form, buy
Man Group; Qinetiq
Wednesday 29 September 2010
Our view: Buy
Share price: 328p (+0.6)
It's an ill wind that blows nobody any good, as the saying goes. In this case, the not-entirely ill wind is the collapse of property services specialist Connaught Group, now under the administration of KPMG. The beneficiary is Centrica, which stepped in swiftly to pick up parts of Connaught's compliance business for the knock-down price of £11.2m yesterday.
Not only does the deal look set to secure about 600 jobs threatened by Connaught's painful demise, and bring in more than 20,000 customer contracts. It is also a further move from Centrica to establish a complete energy services business alongside its traditional supply arm, the fifth such purchase in just two years.
The parts of the Connaught business that Centrica's British Gas arm is buying include gas and electricity services such as installation and maintenance of commercial boilers. Others, such as water and pest control, are not included. This acquisition, the company says, gives it a platform that is needed to develop and rapidly build something it calls a "complete energy solutions business". Whatever that means.
However, in English, the deal should accelerate Centrica's growth strategy in the business energy services market, which is expected to be worth £2bn by 2015. For Connaught, the deal is a necessary evil. For Centrica, it is part of an increasingly well-executed diversification strategy. Alongside the creation of a strong services business, the group is also boosting its reserves. Most recently Centrica laid out £144m to double its stake in Norway's Stratfjord field, following the £229m purchase of wells from Canada's Suncor earlier in the year, and the £1.3bn acquisition of Venture Production last year. The company is also investing heavily in gas storage facilities.
Centrica's share price did not react much to the deal. But every little helps and at 13 times this year's forecast earnings with a tasty 4.2 per cent yield, they are by no means pricey. Buy.
Our view: Sell
Share price: 214.1p (-5.2p)
We last looked at Man Group quite recently (in May) but have returned to the fray on the back of its recent trading update, which contains superficial signs of life, at least when it comes to the performance of the key AHL fund. It put in an improved performance after some distinctly rocky times. Elsewhere, though, things are less rosy. Investors are pulling funds out and profits are set to fall sharply at the half, to $215m (£136m) from $280m.
AHL's bounceback lifted the overall assets under management because what money remains invested grew. What it didn't do was to grow sufficiently for Man to be able to charge any bonus performance fees.
Institutional money is still coming in and the company expects that to continue. It is also hoping to prove sceptics about its deal to buy GLG Partners (criticised as expensive) wrong. The yield on this company remains very strong – it is forecast at 6.3 per cent for this year. But the shares at 14.5 times this year's forecast earnings, although falling to 9 times next year's, are not cheap. We were holders at 238p, but the shares have fallen and found no momentum since. We think the best is over for Man. Income seekers will be attracted by the yield, but we're inclined to pull out until there are more concrete signs of revival. Sell.
Our view: Buy
Share price: 109.4p (-2.8p)
Investors in the defence sector must have their fingers crossed. In the UK, they are contending with the Government's Strategic Defence and Security Review, while across the pond, the US Secretary of Defence is looking to scale back non-operational costs.
This, as Qinetiq, the milliary gadget maker, confirmed yesterday, has led to delayed orders and limited visibility for the future. Given this backdrop, parking your money with the likes of Qinetiq may not seem like the smartest of ideas. But as we've highlighted in the past, this one could yet confound expectations.
The reason is the chief executive Leo Quinn and his self-help plan to put Qinetiq, which has been through some grim times in the recent past, on an even keel. The programme is aimed at reforming the culture of the business and overhauling the balance sheet. We think it could yet spark some new interest in the shares.
Positive newsflow on this front could underpin price gains as peers are knocked back by defence spending cuts. And though it is an admittedly risky investment strategy, we'd highlight the valuation, which, at under10 times forward earnings, is by no means expensive. This is not for the faint hearted, as sentiment in the wider sector is likely to remain depressed for some time. But for those willing to take a punt, we think there is scope for revival at Qinetiq. Buy.
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