The Investment Column: Schroders a decent bet but wait until markets improve

William Hill; Smiths News
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The Independent Online

Our view: Cautious hold

Share price: 1,020p (-73p)

Schroders may be one of our oldest fund management firms – established in 1804 – but the first question for any investor worth his salt should be why it is any different from the rest of the toxic names in the financial services industry?

The answer is not immediately obvious; the group's chief executive Michael Dobson says that the financial markets will return to a semblance of health by next year but even he admits that the rest of 2008 will be tougher. "We continue to see this more challenging period as an opportunity to position Schroders for further growth in the longer term," is the way he puts it.

However, before investors lump Schroders in the credit crunch dustbin, they should consider that watchers reckon the group is significantly undervalued versus its rivals.

"They are a bit of a Curate's Egg," say those at Evolution, an independent group. "Schroders has about £1bn in spare cash and while on a strict headline price/earnings basis they are in line with the peer group, they should be given credit for the cash – even if it hasn't been invested."

The numbers announced yesterday for the three months to the end of March were mixed: pre-tax profits slumped to £42.2m from £93.2m on the same period last year, and the stock was 6.7 per cent down on the day.

The fund manager also posted disappointing writedowns of £7.7m on seed capital investments, but more concerning, Evolution says, is the £25.8m writedown on mortgage-backed securities, which was unexpected.

Still, the concern for investors is not the writedowns, which Evolution says represent just 1 per cent of the group's net asset value, but the prospect of more disappointing figures in the coming months.

Mr Dobson points to the group's investment and geographical diversity and highlights the pre-tax profits of £76.5m in asset management and private banking as a success. Evolution values the group as cheap to similar companies and urges clients to buy the stock, which is sage advice for those wanting exposure to the sector. For those thinking it may take longer for financial markets to recover, patience may be a virtue. Cautious hold.

William Hill

Our view: Buy

Share price: 395.75p (+4.75p)

One of the factors that distinguishes savvy punters is their ability to discern value. That is, to spot horses whose odds are higher than their realistic chances of winning suggest they should be, for whatever reason. And in the never-ending race between Britain's bookies, William Hill currently offers terrific value, its price clearly failing to reflect its potential.

Yesterday's trading statement was encouraging on a number of fronts. Over the first 16 weeks, overall gross win from punters was up 5 per cent – particularly pleasing given that the same period last year was very strong.

The bookmaker did well over the Cheltenham Festival and while the Grand National was painful, the losses on that race need to be put in context – over the full three days of the Aintree Festival, heavily backed horses that had performed well at Cheltenham nearly all failed to transfer their form to the Liverpool track.

The only channel that saw a reverse was telephone betting, but given the strength of the other outlets that can be forgiven. What's more, Hills has so far seen no adverse effects from the credit crunch.

And yet William Hill trades on just 9.2 times this year's full-year forecast earnings while offering a generous prospective yield of 6.5 per cent. To put that in context, Ladbrokes – which is a similar size and makes similar profits – trades on just over 12 times this year's earnings.

Hills has had its problems over the past year or so. It took a long time to find a replacement for chief executive David Harding (more than one favoured candidate said no). Then there are the well documented problems with the company's online offering. But the latter issue is being dealt with and the numbers suggest that new boss Ralph Topping has his hands firmly on the tiller. Based on that, these shares are the value bet of the gaming sector. Buy.

Smiths News

Our view: Hold

Share price: 103.5p (+3.5p)

Apparently, the print media is perpetually struggling against a tidal wave of digital channels and on-demand services. The corollary, therefore, is that newspaper and magazine wholesalers such as Smiths News must be struggling.

Not one bit of it, says the group's chief executive Mark Cashmore. The group, which announced an increase of 5.9 per cent in six-month pre-tax profits, does concede that the economy has made for "challenging market conditions," but says that sales and profit growth are on target for the rest of the year.

On a valuation basis, independent analysts at UBS reckon the group is a decent bet. The company does operator in a tricky sector that will remain choppy for the foreseeable future. That said, the group is doing a pretty good job of keeping its head above water. Hold.

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