The Investment Column: Time to take profits as L&G faces stiffer competition ahead

Rio Tinto; RC Group
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The Independent Online

Our view: Take profits

Share price: 143.25p (+3.5p)

Life insurer Legal & General has proved a reliable bet for investors who followed our recommendation to buy the stock at the start of last year. Steady growth has seen the shares put on 20 per cent, while the company also offers an attractive dividend yield of more than 3.5 per cent.

Yesterday's third-quarter new business figures provided more evidence that the group is on a stable footing, at least in terms of winning market share, with most areas of the business recording impressive volume growth.

However, it will not become clear whether this volume has come at the expense of margins until its full-year results are published in the spring.

Certainly competition is intensifying - not least in the bulk-purchase annuity (BPA) market, where L&G had enjoyed a duopoly with Prudential until earlier this year. While BPA volumes held up in the third quarter, it seems unlikely that the group has not been forced to slash its prices to continue winning the business.

In the individual annuity and protection markets too, its impressive volume gains will only have been achieved by cutting rates.

While new chief executive Tim Breedon says he is optimistic about the year ahead, a possible slow-down in the economy combined with a likely cool-off in UK equity markets could make trading more of a challenge.

Although these are worries that the whole sector is facing, many of L&G's rivals have seen their share price propped up by rumours of consolidation in the industry. L&G, however, remains an unlikely target.

At 143p, L&G is by no means over-valued, and remains well positioned to take advantage of a UK market where the savings habit can only improve over the coming years. In the short- to-medium term, its shares may not perform. Existing investors should take some profits, while new ones may want to wait for a better time to buy.

Rio Tinto

Our view: Buy

Share price: 2,760p (+85p)

The world's mining giants are struggling to keep up with record demand for commodities.

Yesterday came further evidence of this trend from Rio Tinto, the world's second largest player. Its third- quarter output figures showed a sharp drop in the volumes of a number of commodities due to strikes and maintenance stoppages. An update from peer BHP Billiton next week is likely to paint a similar picture.

Rio's copper output suffered the most dramatic fall due to a strike at the Escondida mine in Chile which it co-owns with BHP. The industrial action there ended early last month, but nevertheless took its toll. The group's share of production fell to 81,000 tonnes in the third quarter from 101,700 a year earlier. The shut-down of a smelter at its giant Kennecott mine in Utah only made matters worse. Overall mined copper production fell to 182,800 tonnes from 195,000.

Rio also reported a 1 per cent fall in aluminium output to 215,200 tonnes. Production of hard coking coal continued to recover, but was down 22 per cent on a nine month view as were uranium volumes (down 20 per cent in the first nine months) due to the impact of heavy rains.

Nevertheless, Rio is expected to post a net profit of around $7.6bn this year, up nearly 50 per cent on its 2005 figure. This leaves the group's shares trading at just 8.6 times forward earnings, a substantial and unjustified discount to the wider FTSE-100, which is valued at 13 times.

RC Group

Our view: Buy

Share price: 68p (-1p)

RC Group has developed a suite of technologies which help deal with a good number of the terrorism and security problems the modern world faces. Some of its solutions are straight out of a James Bond film. Take for example its fingerprint recognition system. It can be used as a security device to protect anything from a laptop or jewellery box to a home or office.

It falls within RC's biometrics division which has also developed iris scans and facial and voice recognition systems. Alongside this sits the group's radio frequency identification (RFID) unit. RFID, a successor to the barcode, uses wireless technology to identify objects.

Many corporations have adopted RC's biometric solutions in conjuncture with its RFID tagging kit. For example, if an unauthorised person tries to walk out of an office with RFID tagged equipment, a reader on the door tracks the item while a CCTV camera uses RC's facial recognition software to match the face of the person against a database of employees.

From an investment point of view, the great thing about the Hong Kong-based group is that its technology is already widely used. RC made a profit of £4.5m last year. This is expected to soar to £13.5m in 2006 and to £16.6m in 2007. At less than 10 times forward earnings, its shares are look cheap particularly relative to Nasdaq listed peers.

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