The Investment Column: Equity market worries make Schroders a sell

Psion; Griffin Mining
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The Independent Online

Our view: Take profits

Share price: 1,073p (-34p)

Like most fund management businesses, Schroders has been in rude health over the past year, as UK private investors have finally rediscovered their confidence in global equity markets.

Announcing first-quarter trading figures yesterday, the group boasted a £1.9bn net inflow of retail funds for the period, helping it to a 42 per cent increase in pre-tax profits.

Although institutional assets have continued to dwindle, this is all part of chief executive Michael Dobson's grand plan. With margins in the retail sector so much better than the institutional market, the group has doubled its efforts to win customers here - and the success of the strategy has been evident in the company's bottom line.

Since we first tipped the stock 14 months ago, its shares have risen by some 35 per cent, and since the bottom of the bear market in 2003, they have almost trebled.

Furthermore, the healthy growth in profits has ensured the company's valuation has not become too stretched.

There are, however, two uncertainties which hang over the group. First, Mr Dobson has been sitting on some £800m of excess capital for quite some time. And while investors may be grateful that he has not squandered it on a value-destroying acquisition, they are keen to see it spent or handed back.

Yesterday, Mr Dobson said he was eyeing acquisitions in the US - leaving investors in no doubt that he favours doing a deal over a return of capital. Although the right US deal could carry Schroders to the next level, Mr Dobson's track record is unknown when it comes to big deals.

The other concern is the recent market blip. Asset managers' fortunes are inextricably linked to movements in global equity markets. If this week's market falls turn into anything more than a wobble, Schroders' fortunes will inevitably suffer.

The shares have already fallen more than 15 per cent from the 1,273p highs they hit in March, and there may be some rougher times ahead in the short term. If you've enjoyed the ride up, it's time to take some profits. For new investors, there will be better times to buy.

Psion

Our view: Buy

Share price: 165.5p (-2.25p)

Psion's management must have felt a tinge of regret about selling its 31 per cent stake in Symbian to Nokia last year. Yesterday the software firm boasted that shipments of mobile handsets running on its operating system rose 73 per cent in the first three months of this year and predicted it would maintain this growth in the coming quarters.

There was little Psion could have done to prevent Nokia strong arming it into selling control of Symbian. The Finnish mobile phone giant was, and still is, Symbian's biggest client by far. Psion itself did well from its involvement with the venture, turning an investment of about £10m into £135m in just eight years.

Psion has returned the bulk of this cash to shareholders since selling out to Nokia. Although it looked at using it for a major acquisition, management passed on a number of substantial opportunities in the US after it found that the valuations vendors were asking for were too rich.

Now the group is firmly focused on developing its Teklogix operation. The business makes handheld computers for workers on the move. It recently won a deal with SNCF, the French railway company, to provide it with handheld ticket machines.

The unit is known to be enjoying strong sales growth but key to getting profits roaring will be if it manages to get its costs down. This it plans to do by outsourcing production to a low-cost country. In the meantime, Teklogix is benefiting from the weak dollar as a big chunk of its costs are denominated in the US currency, while most of its revenues come from the UK and continental Europe.

Psion reported a pre-tax profit of £11m last year. This is forecast to rise to £15.8m this year. Its stock trades at 15 times forward earnings once the 33p a share of cash it still has on its balance sheet is stripped out. This is not expensive. Buy.

Griffin Mining

Our view: Hold

Share price: 81.25p (-3.75p)

This column tipped Griffin Mining a little less than a year ago at 32.5p. We were right to do so. The stock closed at 81.25p yesterday, down 3.75p, after full-year figures from the group. Since we first drew attention to Griffin, it has brought its Caijiaying zinc and gold mine in northern China into production. Output there has totalled 155,000 tonnes so far this year, making the company profitable - a rarity for an AIM mining player.

The zinc it produces is sold directly to local smelters, doing away with the need for costly transportation. Griffin has so far always delivered on its promises to investors. In 2006, it is forecast to notch up earnings before interest and tax of $29m (£15m) compared with $400,000 previously. That puts it on a forward rating of just 10 times earnings. Hold for more gains.

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