Citigroup upgrades Man as it hails dividend yield and M&A potential

Citigroup upgraded Man Group to ‘buy’ from ‘neutral’ and lifted the price target to 186p from 164p.

It said Man remains a strongly cash generative business, with no net debt and a well-covered dividend at 4.3% yield.

Citi expects Man to use its cash to "cherry pick" deals to round out its alternative investments offering , perhaps adding private equity/illiquid assets products, or US distribution.

“We estimate Man has $370m utilisable surplus cash and will generate $300m to $400m per annum free cash flow 2016E-2018E. We expect Man to use this to fund share buybacks or for selective M&A. Earnings accretive either way, but our preference would be M&A, to round out Man’s suite of ‘alternatives’ offerings.”

Citi said it expects asset managers to face increasing regulatory scrutiny in 2016-2017, but reckons Man is well placed for this thanks to its strong balance sheet, large size compared to other hedge funds, and relatively low exposure to those segments of the industry where it sees the greatest operational impact.

The bank added: “As hedge fund investing heads for a more mainstream and transparent future, we see larger, managed account and full service providers like Man Group best placed to win fund flows from institutional investors.”

At 1116 GMT, Man shares were up 1.6% to 165.60p.