Investment Column: Blue-blooded Schroders is a little too rich

Fiberweb; St Ives

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The Independent Online

Our view: Avoid

Share price: 1,562p (-13p)

It appears institutional investors are willing to trust Schroders to look after their money in turbulent times.

The blue-chip and blue-blooded fund manager yesterday reported a rise in assets under management to £204.8bn, which was ahead of most analysts' forecasts and was helped by net new business of £5bn.

The latter is not to be sniffed at, particularly in the current volatile climate, though the company noted a reluctance among retail investors and the financial salesmen who advise them to commit their cash to equity markets. They offer better margins than institutional cash. Net inflows from such intermediary clients fell to £400m from £5bn last year, which takes some of the gloss off the figures.

All the same, the company is still reporting healthy earnings – they rose to £215.7m from £188.2m a year earlier. In what we take as a good sign, this supported an 18 per cent increase in the interim dividend to 13 pence.

So there's a lot to like, but does this mean it's time to rush into the shares? In November we were sellers of Schroders at 1,667p. That's proved to be a good move.

And while the company has performed well, its stock reflects that even after the recent falls. Numis has the company on 13.1 times 2011 forecast earnings, though that figure is much lower if you strip out the company's surplus cash, which it has held for a long time.

All the same, it's on a slight premium compared with the sector, and the company was muted on its prospects for the coming months, particularly when it comes to higher-margin intermediary and private-banking businesses.

What's more, the institutional funds it is attracting can be less "sticky" than the former sources of business.

This was a creditable set of results from Schroders, but we think there are better opportunities in the fund-management sector (for example Aberdeen, or Jupiter). As a result we'd avoid these shares.


Our view: Buy

Share price: 49p (-5.75p)

Fiberweb, whose non-woven materials are used in everything from baby nappies to specialist industrial wipes, disappointed investors with news of a fall in first-half profits yesterday.

The result was partly down to the pressure on margins, owing to what the company said was "a sharp increase in raw-material prices in the first half of 2011". Indeed, raw-material costs were up by around 18 per cent against the equivalent average in the fourth quarter of 2010. Still, the company does deserve credit for partly mitigating the hit with operational efficiencies and by growing volumes.

On the upside, Fiberweb did say that the costs are likely to be "fully recovered in the second half as a consequence of price increases" in its hygiene and industrial arms and as a result of increased hedging. It also expects to benefit from a pull-back in raw-material costs.

In other words, things are likely to get better. Moreover, investors should note the thin valuation, with the stock trading on around six times forward earnings for 2012. The weakness presents an opportunity ahead of the expected recovery later this year.

St Ives

Our view: Hold

Share price: 78.25p (-1.62p)

St Ives, the print and marketing services group, yesterday told investors that its profits for the year ending 29 July would be in line with market expectations – that suggests a final result of around £21m.

This was reassuring as the group's shares have this year fallen back from the recent high of 114p in December, partly over concerns over the economy. St Ives – which prints books for publishers including HarperCollins and makes point-of-sale material for retailers such as Marks & Spencer – yesterday said it was benefiting from the action it had taken to mitigate price pressures and declining volumes in its print business.

That said, the group reinforced its push into marketing services by acquiring Tactical Solutions for £15m in April, which followed its purchase of Occam last year. The company has also won a large direct-marketing contract recently with a financial-services firm, rumoured to be HSBC, and its shares trade on a modest forward-earnings ratio of only 5.5.

However, while we think St Ives is on the right track, we expect its markets to come under further economic pressure over the next year. Hold.