The Investment Column: Game Group faces struggle despite new-console hopes

Panmure Gordon; Petra Diamonds
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Our view: Avoid

Share price: 79.5p (-2.5p)

Now is not a good time to be retailing computer games. Yesterday's annual results from Game Group, the market leader in the sector, are testament to this. The company reported an 80 per cent slump in annual profits to £5.4m. Profit margins continued to fall while like-for-like sales in the 12 weeks of the new financial year rose just 2.2 per cent.

Game finds itself under pressure from two sides at present. First, it faces falling prices of consoles and actual games. Sony recently reduced the price of the PlayStation 2 in the US and this tactic will soon be repeated in Europe. Second, it is up against growing competition as more retailers are selling computer games, including many supermarkets.

Looking to the future, Game's big hope is November's launch of Sony's PlayStation 3 and Nintendo's next generation machine, to be called Revolution. New hardware usually puts a rocket under demand for games as well as consoles. However, Game tends to struggle to secure enough hardware from producers to meet demand. This is unlikely to change with the latest round of launches.

A takeover is also a possibility and would be welcomed by the company's long-suffering shareholders. If Game is going to be taken over it will most probably be by Gamestop. Should the US player decide to expand into Europe, Game's portfolio of 700 stores would make a perfect acquisition. However, this scenario is already adequately reflected in the company's shares. Avoid.

Panmure Gordon

Our view: Hold

Share price: 231.5p (+6p)

A year ago to the day, Panmure Gordon merged with the fellow stockbroker Durlacher. The deal made a lot of sense. Durlacher's strength lay in servicing really small companies while Panmure enjoyed a good reputation among bigger corporates. Separate they would have struggled to become seriously profitable. Combined it is an altogether different story.

For the year ending 31 December 2006, Panmure Gordon - the company kept the name which has been associated with stockbroking for more than 138 years - is expected to make a profit of more than £10m. Yesterday, the group's AGM statement showed it is well on the way to meeting this forecast. In his statement to investors, Panmure's chairman Richard Wyatt boasted that the institutional equities operation - that is, the business of advising big investors on which stocks to buy - is experiencing a "particularly strong performance". This accounts for about half of the company's yearly sales.

Meanwhile, its corporate finance unit is also doing well. It has helped clients with more than a dozen corporate transactions since the start of the year and the company's pipeline of such deals has really taken off since March.

On a 12-month view, Panmure shares have more than doubled. In recent months they have been held back by worries that Lazard will soon want to sell its 30 per cent stake in the firm. A disposal would certainly dent Panmure's stock price. However, these fears seem misplaced.

Lazard is unlikely to be in any rush to exit. First, momentum is clearly building at Panmure and as long as the stock market remains buoyant this will continue. Second, the sector looks ripe for further consolidation. If that happens, Lazard should get a significantly higher price for its shares than yesterday's closing price of 231.5p. Small investors should hold on to their shares too.

Petra Diamonds

Our view: Hold

Share price: 86.75p (-0.25p)

A little less than nine months ago this column urged investors to have a punt on Petra Diamonds. Back then the stock stood at 64p. Yesterday it closed at 86.75p after a positive update from its Alto Cuilo project in Angola. Analysts have referred to the diamond exploration project in the west African country as one of the most exciting in the world.

The mining giant BHP Billiton would agree. It is funding the development and will get a share of the profits in return. Unlike most junior miners on AIM, Petra also has producing assets. For the year to 30 June 2006, it is expected to generate sales of £12m thanks to output from its South African mines. In the next couple of months, turnover will be boosted by the start of production in Sierra Leone.

As with most commodities, the price of diamonds has been driven higher by demand from China and India. With little in the way of new finds, this trend is unlikely to be reversed any time soon. The shares should go higher.