Investment Column: Great results, but Man's not a buy just yet
Cable & Wireless; JJB Sports
Friday 28 May 2010
Our view: Hold
Share price: 238.3p (+23p)
Man, the hedge fund group which recently announced plans to acquire US peer GLG Partners, lured the bulls with an impressive set of full-year results yesterday. The shares surged by more than 10 per cent on news that funds under management, despite being hit by the weakness in the euro, were broadly unchanged from the levels seen at the end of March. Even better news lurked in the detail, with Man saying that its flagship AHL fund had booked a positive performance in the year to date. This is reassuring, and offers grounds for optimism about a recovery at the group, which has not been having an easy time of it recently.
On the face of it, this sort of improved performance should lead to a period of strength in the share price. Indeed, several City analysts were quick to wade in with recommendations that investors wade in. We aren't so sure, however. First, though buying GLG is seen as a plus for Man, the initial announcement sparked a sell-off amid concerns about the pricing of the deal. Those concerns eventually subsided, but we think medium-term sentiment will depend on how well the two companies integrate. As Numis points out, the deal would be value accretive if management can deliver revenue synergies. We have no reason to doubt Man's abilities at putting the two businesses together, but we'd prefer to wait for some more clarity on how this marriage pans out before getting over-excited. Second, though the valuation is supportive – Man, while trading on 13.1 times Evolution's forecasts for the full year, offers a hefty yield of 14.2 per cent (although that falls to 7 per cent next year) – we worry about the volatility in the market and the ongoing sovereign debt woes in Europe. The fear is that if the continent's problems escalate, financials of all stripes could be caught in the crossfire as investors flee to safe havens. So while we were encouraged by yesterday's results, we would only hold for now.
Cable & Wireless
Our view: Buy
Share price: 79.7p (+0.25p)
The second half of the newly demerged Cable & Wireless double act put out its maiden full-year results yesterday. Cable & Wireless Communications looked good, too, following its demerger from Cable & Wireless Worldwide earlier this year.
The numbers looked doubly impressive in a telecoms sector that the chief executive, Tony Rice, described as "not a happy place", beating consensus to post revenues of $2.3bn. The group, which focuses on consumers in far-flung beauty spots, reported growth in three of its four territories, although the Caribbean is struggling.
Nonetheless, the growth story is compelling. C&W company expects to see revenues rise as the global economy recovers and there are strong opportunities in its regions. One particularly interesting business is expected to be in broadband, where market penetration is low but growing fast. C&W is also looking to grow in mobile data and launched a pay TV service in Panama which it will expand to all of its regions. The move will allow it to offer customers the lucrative "triple play" of TV, broadband and telephones. Net debt is better than expected at $664m and cash flow is strong. Collins Stewart puts its price at 10.4 times estimated 2010 earnings, and believes the shares will go higher. So do we. Buy.
Our view: Buy
Share price: 17p (-2.75p)
In the words of its new chief executive, Keith Jones, yesterday, JJB "faced a fight for survival" last year, although a series of restructuring measures safeguarded its future. For the 53 weeks to 31 January, JJB suffered a pre-tax loss of £68.6m, on total sales that tumbled by 42 per cent after the retailer closed non-core operations and suffered severe stock shortages.
City analysts also expect it to make another – albeit sizeably reduced – loss this year. Furthermore, JJB faces an uphill battle to regain the trust of customers and suppliers. But for several reasons, it's out of intensive care and returning to health. For a start, the 250-store retailer's underlying sales have recovered from being down by 2 per cent in February to being up by 19 per cent in May. Its financial foundations have been vastly improved and gross margins were up by 6.8 per cent over the 16 weeks to 23 May.
Furthermore, JJB has restocked its shelves, including its World Cup and seasonal ranges. In addition to next month's football extravaganza in South Africa, JJB will also receive a huge boost from the 2012 Olympics. While investing in the company could make one feel as nervy as watching England, the shares are still very cheap. JJB is worth backing. Buy.
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