Investment Column: Wolseley turns the income taps back on

Man Group; Faroe Petroleum
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The Independent Online

Our view: Hold

Share price: 2,154p (+65p)

Wolseley was the toast of investors yesterday after it reinstated dividend payments for the first time since 2008. The Treasury may soon be cheering it too: the world's biggest plumbers and builders merchant, relocated its HQ to Switzerland for tax reasons last year, but hinted yesterday that it might follow WPP in returning to the UK thanks to last week's Budget.

Wolseley, which operates the Plumb and Build Center brands in the UK, said yesterday construction sectors had now "broadly stabilised" in most of the 25 countries in which it operates.

In particular, the group touted more favourable trading conditions in the repairs, maintenance and improvement markets in the US, which accounts for 41 per cent of total revenues and more than half of group trading profit. The improved performance of its US business helped Wolseley to grow trading profits by 64 per cent to £275m over the year to 31 January – and to reinstate that dividend, worth 15p at the interim stage.

On the downside, the group gave warning that the impact of the recent rise in VAT and Government spending cuts means the outlook for its UK business, which accounts for 19 per cent of revenues, is "uncertain", despite it growing trading profit substantially to £51m last year. Investors should also note that Wolseley's shares have powered ahead since sinking to 1,223p in August and have outperformed the FTSE 100 by more than 25 per cent during the past year. The group now trades on a forward-earnings multiple of just under 17. Even with the dividend, this lofty valuation makes the company only a hold.

Man Group

Our view: Hold

Share price: 246.2p (+1.7p)

After a rocky couple of years there are signs of life at Man Group, the world's biggest publicly traded hedge fund. It said yesterday that it expects new client money to outstrip redemptions in the final quarter of the year to March after two years of net outflows. Predicted annual pre-tax profit of $560m (£350m) is ahead of consensus and Man will pay a dividend of 22 cents.

The reason for the outflows was the ailing performance of Man's flagship AHL fund, which accounts for about a third of assets. The computer-driven fund is meant to track and outperform the market but it had a rocky final quarter because of volatility caused by Japan's earthquake and unrest in the Middle East. Man's chief executive, Peter Clarke, bought the hedge fund GLG last year to reduce reliance on AHL and add more discretionary management. The deal started to pay off in the final quarter as GLG's inflows offset continued withdrawals at AHL.

We still think AHL is the key to Man's valuation. The case for AHL is that it has suffered setbacks in the past and over the long run has generated double-digit returns. It also has a group of academics at the Oxford-Man Institute of Quantitative Finance working on refinements.

With the shares on an apparently undemanding 12 times 2011 forecast earnings with a yield of 5.6 per cent, and with fund flows moving in the right direction, now could be a buying opportunity. But we prefer to wait for more certainty on AHL. Still, we are moving Man up from September's sell recommendation to hold.

Faroe Petroleum

Our view: Buy

Share price: 170p (+12p)

Faroe Petroleum lives in the topsy-turvy world of junior oil explorers where losses are not all they seem. Take yesterday. The group posted £26m losses for 2010, more than double the £11.8m recorded in 2009. And the share price shot up, by 7.8 per cent at one point.

How so? In part, because the soaring losses reflect a flurry of exploration last year with the chance of riches to come. And in part because the Budget's hike to taxes on oil profits will not hit Faroe as it has no profits to tax.

Topsy turvy indeed – but yesterday's buyers are on to something. Firstly, if you have a taste for the neck-or-nothing juniors, Faroe is a good punt: with 41 licences and a seven-wells-per-year plan that outstrips rivals. Secondly, it had two hits in Norway last year and is still working on the promising third in the UK. Finally, the plan is to raise shareholder value by boosting production to bring in the cash for more exploration, and the 18 per cent interest in the Blane field bought last October should help.

It might seem backwards to want a piece of a company with spiralling losses. But that's junior oil for you. Buy.

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