Market Report: Man weighed down by valuation worries

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The Independent Online

Man, the London-based hedge fund group, was under pressure as traders banked profits on valuation concerns, with Credit Suisse saying that the recent rally had left the stock trading close to fair value.

At 14.8 times forecast earnings for March 2011, and at around 12.3 times adjusting for excess capital, the price-to-earnings multiple was looking "relatively full", the broker said, revising its recommendation to "neutral" from "outperform".

Credit Suisse also weighed in on the investment case, arguing that while the momentum in private client sales is strong, it harboured concerns about the impact of investment performance at the company's flagship AHL fund on future sales.

"In [the first half of the 2010 financial year] Man [was] able to market a strong double-digit 12-month investment performance, but as we head into next year AHL is likely to be down yoy [year-on-year] on a 12-month basis and lagging other funds and the rise in asset values," the broker said. "Clearly the longer that AHL goes without a recovery the more likely it is that sales momentum will eventually be impacted. Moreover there may be some concerns about the importance to Man of this one fund with AHL-related private client products contributing 97 per cent of management fee earnings in the first half of the year."

The assessment contributed to the stock's decline to a session low of 341.1p, down just over 3 per cent in early trading. Man pared losses as trading came to a close, ending 1.3 per cent or 4.6p weaker at 347.5p.

Overall, the FTSE 100 was 31.54 points lower at 5323.96 and the FTSE 250 lost 88.93 points to 9181.18, with both indices struggling to find direction following a sharp sell-off in China, where equities declined amid speculation that local banks may have to raise funds to meet capital adequacy requirements. News that the initial estimate for annualised US GDP growth over the third quarter had been revised down also dampened sentiment, as did a disappointing report on the American housing market.

Thomas Cook, down 3.4 per cent or 7.3p at 206.2p, was among the laggards on the benchmark index, this time thanks to Numis, which switched its stance on the tour operator's stock to "hold" from "add". The broker said it was becoming concerned that "further capacity adjustments, if deemed necessary, will increasingly impact profitable lines of business and necessitate further restructuring".

"Thomas Cook has said that it does not anticipate further significant capacity cuts in any key market for summer 2010," Numis said. "Nevertheless, we suspect that downward capacity planning may be required – with a potential negative margin impact." Numis also weighed in on sector peer TUI Travel, which fell to 242.8p, down 5.7p, after the broker scaled back its target price for the stock to 290p from 303p.

Also on the downside, the Royal Bank of Scotland fell by almost 4 per cent or 1.495p to 36.305p, taking the wooden spoon on the benchmark index, after the Bank of England Governor, Mervyn King, revealed that the central bank had extended £61.6bn in emergency liquidity assistance to RBS and what was then HBOS at the peak of the banking crisis in October last year. HBOS has since merged with Lloyds to form Lloyds Banking Group, which last night gained 2.3p to 93.81p, claiming pole position on the FTSE 100, after pricing its £13.5bn rights issue at 37p per share, a 59.5 per cent discount to Monday's closing price.

The Execution analyst Joseph Dickerson said that the rights issue, coupled with the £1.5bn equity component of the recent concluded debt exchange, will boost Lloyds' tangible equity base by "a net £12.7bn". "With an 8.9 per cent core T1 [tier 1] ratio today and an estimated 10.6 per cent by 2011, we view the bank as moderately over capitalised in 2011, particularly factoring in a £21bn balance sheet loan loss provision," he said, adding: "A strong capital position should contribute in Lloyds' cost of funding (funding costs are already improving) and supports our case for a net interest margin expansion to 2.15 per cent in 2011 (from 1.8 per cent today)."

The speculators continued to peg their hopes on International Power, which gained 3.6p to 275.6p. Talk of a possible 400p per share bid persisted despite traders attributing the day's gains to news from Down Under, as revised carbon trading proposals from the Australian Department of Climate Change proved better than feared.

On the second tier, National Express, down 4.7 per cent or 17.1p at 345p, continued to drift lower as it emerged that Jorge Cosmen had topped up the Cosmen family's stake for the third time in less than a week, buying another 400,000 shares to take the total holding to 19.72 per cent. The purchase fuelled speculation that the Cosmens were stepping up moves to stand in the way of the company's rights issue, which is due to be put to a vote before shareholders later this week. Ahead of the vote, traders were busy speculating about the stance of brokers who hold shares on behalf of other investors. In the wider sector, Stagecoach was 1.5p behind at 149.5p,while Go-Ahead eased by 28p to 1310p.

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