The Investment Column: Take profits on SJP as 50% growth is unsustainable

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The Independent Online

Our view: Take profits

Share price: 331p (+13p)

St James's Place, the upmarket wealth management business, once again smashed analysts' expectations yesterday, as it unveiled yet another set of top-drawer results.

Pre-tax operating profits at £80m - up more than 50 per cent on the same period last year - were more than 10 per cent above City estimates. New business leapt an impressive 55 per cent on the first half of 2005.

SJP has more than 1,110 advisers. They make up a distribution network which then passes business on to the company's own products. For the sectors where the group has no appetite to launch its own offering, it outsources to other industry players.

Although the financial services industry as a whole has had mixed fortunes over the past few years - as Britain's savings culture has dwindled in the wake of a harsh bear market and a string of mis-selling scandals - SJP has consistently delivered phenomenal growth.

There have been a number of factors driving its success. The key has been the resilience of its target market: wealthy individuals who need advice regardless of the broader market sentiment.

Also, changes to pensions laws earlier this year have had a big effect on the rich in this country. This has brought SJP an incredible volume of new customers and the company believes the trend will continue over the coming months and years.

The only downside to SJP today is its valuation. Trading at 1.6 times its embedded value - a common measure of life insurers' worth - it is well ahead of its peers, many of whom trade closer to 1.3. Even after a 15 per cent increase in its dividend yesterday, its yield is very small.

While there is surely more upside to come, growth of 50 per cent is unsustainable, and the group's valuation must come back down to more reasonable levels at some stage soon. Now is the time for existing shareholders to take profits.

Games Workshop Group

Our view: Avoid

Share price: 327.75p (+36.75p)

2006 has been an annus horribilis for Games Workshop Group, the maker of table-top war games. The company's management will be hoping that yesterday's full-year results mark the nadir for the group. The figures showed Games Workshop recorded a 73 per cent slump in pre-tax profits to £3.7m for the 12 months to 28 May.

Largely to blame for the slump is what the group has described as the bursting of the Lord of the Rings "bubble". Games Workshop had invested heavily in a new game to be sold alongside the series of hit films based on JRR Tolkien's books. However, with the passing of hype surrounding the films, customers have deserted the group.

Matters have been made worse by falling sales to smaller retailers in the US. Many have been forced to close amid growing competition from giants such as Wal-Mart.

Meanwhile, ever falling prices of computer consoles must also be a long-term concern for the company as it is likely to prompt customers, mainly teenage boys, to increasingly shun its highly complicated games in favour of the likes of Lara Croft and the latest version of Fifa soccer.

To its credit, Games Workshop managed to reduce its overheads by £2.8m during the year and trading enjoyed an improvement during the spring. But it is not clear whether the company has really turned the corner.

Although it will pay a dividend of 19p a share (leaving the stock on a yield of 5.7 per cent), this is not covered by earnings and will be paid by extra borrowings. With the company trading at more than 35 times forecast earnings for 2007, its shares are best avoided.

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