The Investment Column: Competition fears mean 888 is near the end of its lucky streak

Dimension Data; Hichens Harrison

Our view: Take profits

Share price: 233.25p (-1.25p)

Shares in online gambling groups have had a rough 12 months as a series of attempts have been made to stamp out the $12bn (£7bn) industry in the US. Now, it looks like the mood is turning in favour of internet gambling as several US senators have raised objections to proposals for a clampdown.

In any case, 888, which runs the Pacific Poker website, thinks it is in a better position than rivals such as PartyGaming and Sportingbet because it is less reliant on the US. By driving business into Europe and other parts of the world, it has purposefully cut the share of revenues it gets from the US to 55 per cent from 90 per cent five years ago, with the declared goal of getting it down 20 to 25 per cent.

Shares in 888 fell on their debut last October after the bigger rival, PartyGaming, warned the internet poker craze had started to wane. None the less, we tipped them at 170p and they have since made good progress. The stock closed at 233.25p yesterday.

Most of 888's business is still from casino games such as blackjack and roulette, but poker is catching up rapidly, helped by the new multi-hand feature. Net revenues climbed 42 per cent to $84m in the first three months of the year, with casino takings up 15 per cent to $45m and poker nearly doubling to $39m. The 888 brand has been getting increased media coverage thanks to its sponsorship of the recent World Snooker Championship and Middlesbrough football club.

But the company faces mounting competition, especially as PartyGaming has been expanding into casino games such as blackjack. Unlike some of its rivals, 888 does not have a shared purse which allows punters to play different games using the same account, and needs to broaden its game offering. It also faces an uphill struggle with its plans to buy a sports-betting business at a reasonable price. Given these concerns, investors would do well to take some profits.

Dimension Data

Our view: Sell

Share price: 49p (-3.75p)

Dimension Data's first-half results contained headline grabbing growth figures: revenue rose 16 per cent while operating profit jumped 33 per cent.

But scratching the surface showed the South African-based IT services player had far less impressive news at the margin level. Although the operating margin edged up to 2.6 per cent from 2.2 per cent a year ago, the improvement fell short of analysts forecasts. That cast doubt on the company's ability to hit its 4 per cent operating margin target by September 2007. At the gross margin level, the company recorded a 1.1 per cent fall compared with a year ago to 20.6 per cent as a low-margin sales growth took its toll.

Like the UK rivals Morse and Computacenter, Dimension Data is trying to increase its exposure to higher-margin services work while reducing its dependence on product reselling. Yet in the first half, growth in services was clearly outstripped by product sales. Management wants to derive 50 per cent of its revenue from services work, a target that is beginning to look unrealistic in the short term.

Stripping out exceptional items in the first half, Dimension Data's adjusted earnings fell 5 per cent over the period. Other sore points include weak European trading and poor cash generation. Even factoring in a 7 per cent fall in the shares to 49p yesterday, the stock still trades on a premium to the IT services sector, a premium that simply cannot be justified. Sell.

Hichens Harrison

Our view: Buy

Share price: 220p (+12.5p)

Hichens Harrison, the City's oldest firm of stockbrokers, is to expand into the Middle East by opening an office in Dubai. The move, announced yesterday, is part of the group's aim to become the broker of choice for emerging markets. It has already opened offices in Asia, Africa and South America. Hichens promises to appoint a prominent corporate financier soon with extensive experience in the Middle East and North African markets.

The business plan is simple. It opens low-cost offices in the emerging world and convinces local companies the best way to finance themselves is by raising equity on London's booming AIM. For that they get a fee, the size of which depends on the amount of money they raise. Hichens also gets paid an ongoing retainer for acting as the broker and nominated adviser to these companies.

For now, it is focused on servicing mining and renewable fuel companies. Among its most recent floats are BDI Mining, South China Resources and Peninsular Gold. The broker also covers the financial services and technology sectors. At present, its push into emerging markets makes it unique in the City and means it faces little competition. Over the coming months investors can expect to see Hichens open more offices abroad, most probably in eastern Europe.

Last year the group made an operating profit of £1.2m. Given the booming stock market, 2006 should see a solid improvement on this figure. Yesterday, Hichens shares rose to an all-time high of 220p but their advance is unlikely to stop there. Buy